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Link to BBC Article

Thursday, 20 January, 2000, 15:10 GMT

US trade deficit hits new record

Imports into the US are at record levels The US trade deficit is casting an increasingly long shadow over the US economy.

The powerful consumer boom is sucking in imports at record levels, creating a huge gap between US imports and exports.

In November, the US imported more than $109.4bn worth of consumer goods in advance of the holiday season, while it managed to export just $82.9bn to the rest of the world.

That left a trade gap of $26.5bn, the largest ever recorded.

That was an increase on October's $25.5bn, itself a record, and surprised analysts.

But they were divided as to whether the trend would continue.

"Once again imports remain on fire," said Kathy Bostjancic, of Merrill Lynch in New York.

"Until imports start to temper a bit, the gap is going to widen."

Other experts predicted a turnaround.

"Domestic demand will slow as overseas demand increases. That will let the trade deficit shrink very modestly over the course of the year," said Ram Bhagavatula of Natwest Global Financial Markets.

Foreigners finance boom

The US is now on track for a record trade gap this year of more than $300bn.

The deficit grew more sharply with Canada and Western Europe, while it diminished slightly with Japan and China.

The continuing rise in oil prices also contributed to the growing deficit.

At the moment, foreign investors are continuing to pile money into the US stock markets, and are funding the shortfall.

But any big fall in the stock market could put paid to that, leading to an exodus of capital from US markets, and putting further pressure on the dollar.

Trouble for the Fed

A run on the dollar could also put the US central bank, the Federal Reserve, in a dilemma.

It is widely expected to raise interest rates at its next meeting in February to slow the booming economy.

Normally, higher interest rates act to attract more funds to dollars, boosting the currency. But if the interest rate hikes cause a stock market slump, that would negatively affect the dollar.

And a slump in the dollar would also boost inflation.

That is because a lower dollar would make imported goods more expensive, raising their prices domestically and increasing overall retail prices.

The dilemma may cause the Fed to tread more carefully as it debates its next policy move.

The issue of how far interest rates need to rise worldwide is also likely to be discussed at a meeting of finance ministers from the world's richest countries in Tokyo on Saturday.

-- snooze button (alarmclock_2000@yahoo.com), January 20, 2000

Answers

damm if they do....damm if they don't......What a predicament

-- kevin (innxxs@yahoo.com), January 20, 2000.

Snooze: Good catch. I posted below the article on Fed Governor Laurence Meyers remarks about the Fed. I read the whole speech which is about eight pages and I think he is saying that yes, we have to raise the rates to get a "soft" landing and not a "hard" landing.

-- Susie (Susie0884@aol.com), January 20, 2000.

Outstanding post. The Fed may indeed be caught on the horns of a dilemma...

-- Mad Monk (madmonk@hawaiian.net), January 20, 2000.

Dilemma yes, surprise no. When you play the big bully on the block for too long, the consequences come back to you in one way or another...

-- Chuck (cestin@aa.net), January 20, 2000.

Indeed, our economic situation is precarious. But I'm puzzled by some of the statements in this article.

Normally, higher interest rates act to attract more funds to dollars, boosting the currency. But if the interest rate hikes cause a stock market slump, that would negatively affect the dollar.

I don't understand why the stock market and the dollar should be related in this way. Foreign investors could adjust to a market slump simply by shifting their dollars to interest bearing instruments that would become more attractive as a consequence of a Fed rate hike. But supposing the article is correct leads to the next passage.

And a slump in the dollar would also boost inflation.

That is because a lower dollar would make imported goods more expensive, raising their prices domestically and increasing overall retail prices.

This doesn't seem to take into account the effect of exchange rates on demand, presumably decreasing the demand for goods imported into the US, while increasing demand for US exports. A net result might well be to improve the US trade deficit.

What would concern me most about a stock market slump is the amount of borrowed money at risk.

-- David L (bumpkin@dnet.net), January 20, 2000.