Trade Deficits & Long-Term Dollar Decline

Trade deficits happen when a nation-state exports more than it imports. Some nation-states like Japan and China, happen to always be in trade surplus. Other countries, like the United States, always happen to be in trade deficit, as mentioned earlier. Whenever a country remains in a deficit position for a long time period, its currency suffers, the inflation rate goes up, and the value of one’s savings and investments declines. The decline can accelerate to currency collapse, starting a firestorm in domestic financial markets; recent examples include Argentina and some Pacific Rim states. Structural trade deficits of this type that exist between the United States and both Japan and China concern many prominent economists, who see them as a stimulus for an immense decline in the dollar’s value.

United States exports were roughly in balance in 1970. but in 1992, the trade deficit expanded widely to 36.5 billion dollars per year. By the year 1995, it had grown to 105 billion dollars. By 2000, it had ballooned to an incredible 378 billion dollars. In 2003, the trade deficit got to 540 billion dollars – a number that scared Wall Street out of its wits. Very few people can remember the last time the United States ran a trade surplus; it was in 1975. even fewer people can remember the time when the United States was not beholden to Asia and Europe to prop up its bond market by trading its dollar balances for its government debt. The many dislocations in the international economic system brought on by the structural U.S. trade imbalance go beyond the scope of this writing. But we will focus briefly on a couple of the most obvious topics: the immense buildup of foreign-held dollar debt and the plunging international value of the dollar.