Mike, if I may join the discussion, let me make a few comments on how I think the situation will impact the US. Hopefully, I won't break the string of intelligent comments.
At the present time, the large trade deficit is a god-send. Without this pressure valve releasing steam, the American economy would have overheated and the Federal Reserve would have already hiked rates.
The circle of investment inflows driving up US assets and the dollar -thereby attracting more inflows and bidding them up even more is presently benevolent. It keeps inflation low and benefits the American consumer.
The deficit, the investment flows, the rise in America's currency and its' markets are all connected. As you point out an imbalance such as this one cannot continue forever, and this imbalance is certainly reaching large enough proportions to warrant attention if not deep concern.
Ideally, as the US economy slowed our interest rates would be cut. This would lessen demand for the currency and bring down its' level. This would help US companies compete and the trade deficit would shrink. Unfortunately, at the present time, the United States is the main demand engine for the world. Now is not the time to pull the demand rug out from under the world economy. We need increased demand from, Europe, Japan and Asia before the US can safely start to unwind its' massive trade imbalance.
How will this impact the financial markets? This should be interesting. Perhaps, if it happens at the right time, it will be orderly and uneventful. If a decline in the US dollar prompts a massive reduction in investment and a sharp drop in US markets, then this benevolent circle could easily turn malevolent.
Robert |
