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Peter Schiff

Peter Schiff

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the…

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Record Trade Deficit despite Lower Dollar

Today's release of a record $61 billion dollar February trade deficit continues to confound the "experts" who have constantly predicted that a weaker dollar would be the cure for America's exploding trade imbalance. If anything the statistical record is showing an inverse relationship between the dollar and the deficit. The more the dollar falls, the higher the deficit rises.

Although the dollar has indeed fallen for three consecutive years, and is now trading near its all-time record low, America's monthly trade deficit is now at its highest level ever. If February's dismal performance were repeated each month for an entire year, America's annual trade deficit would eclipse $730 Billion (approximately $2,400 worth of borrowed goods for every man, woman, and child in the United States). However, in the absence of a significant change in the current dynamic, and given its current trajectory, this staggering projection is likely to be exceeded.

The reality is that a falling dollar, by itself, only exacerbates the trade deficit, by increasing the cost of imports. In addition, as domestic savings continue to decline, America becomes less able to finance the capital investments necessary to increase the production of consumer goods, thereby diminishing its ability to export. Today's data evidences this perfectly, as imports surged 1.6% while exports rose by a meager .1%.

What is required for America to balance its books is a substantial change in the underlying dynamic of its dysfunctional economy. To export more and import less, Americans must consume less and produce more, requiring them to save more and borrow less. Since better than 80% of U.S. GDP is dependent on borrowing and spending, this adjustment will require a significant recession, unprecedented in the post-war era. In addition, as service sector jobs produce a limited output of tradable goods, significant transitory unemployment will result as many service sector workers seek more productive employment.

Further, as this transition necessitates much higher interest rates, and significantly lower assets prices (particularly stocks and residential real estate) its ramifications are indeed profound. Efforts by the government, the Fed, and foreign central banks to resist this change and postpone the recession, only serve to increase the size of the ultimate adjustment required. This delay will only exacerbate the economic pain inherent in the transition.

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