re: free trade:
Free trade only works if the terms of trade are roughly equal, and trade between countries is roughly in balance. Chronic massive trade deficits are not compatible with free trade. Over the long term, trade has to be in balance.
Something has to give. My guess is, it will be the dollar that gives. For a long, long time, we have been paying for our imports by letting foreigners own more and more of America. We have traded our current consumption, for their future consumption. If foreigners were buying our products with the money they get from selling things to us, then there wouldn't be a trade deficit. Instead, they just buy more and more U.S. Real Estate, stocks, and bonds. This is not a situation that it tenable, longterm. At some point, foreigners will start pulling money out of dollar-denominated assets. The dollar will start falling, and these two trends (foreigners taking their money home, and a falling dollar) will be in a self-reinforcing downward spiral. If foreigners start selling our bonds, this will cause a massive credit squeeze, because the U.S. has a negative savings rate. We depend for all (100%) of our capital needs, on foreigners. This downward spiral will only end when U.S. consumption has declined enough to create a positive savings rate, and a positive trade balance. The implications of that are not priced into stocks now, IMO. |
