Sunday, November 15, 2009

The Death Knell of the Dollar

On Friday, the Department of Commerce revealed statistics for our imports and exports for the month of September and the results were both surprising and alarming. The trade gap or the difference between what we import versus what we export widened by the largest percentage in a decade!  Exports grew for the fifth straight month, but imports grew even faster.  This is alarming since the dollar has declined by 12% since December of last year and normally one would expect the opposite:  a cheapening of U.S. goods and more expensive imports, thus NARROWING the gap. 

This came as a surprise and it will mean that GDP, which takes trade into account will, in all likelihood, need to be revised lower. 

Most alarming was that the rise in imports  was only about $26 Billion in May with a higher dollar, but has now grown to $36.5 Billion in September, all while the dollar was continually falling.
It's likely to get worse.  Oil, which is a large component of overall imports,  rose in price to the tune of 10% in October.

The U.S. has become a service economy and the small surplus in services grew by only 0.2%. The service surplus has grown by 13%, however, in the last year.  This may indicate that even services are  being  more outsourced in addition to manufacturing: a potentially terrible sign that even our remaining strength in the trade mix is slipping.

Imports surged by the largest amount in 16 months, which is counterintuive since a lower dollar makes foreign goods more expensive. Another key factor in the increase was a large jump in purchases of autos and auto parts, possibly as a result of the termination of the short-lived "Cash For Clunkers" program.
Needless to say, our auto industry remains uncompetitive despite the promises of the automakers that a turnaround was in the offing.

To be fair, there is the possibility that the trade numbers respond to a lag, but a year of a steadily declining dollar ought to be taking effect by now.  Since it hasn't, the U.S. has no choice but to allow, or even encourage, a continued fall in the dollar despite the increase in inflation that will accompany it.

The problem is that markets are hard to control and what is a steady decline now could begin to accelerate, especially as holders of dollar denominated debt, which carries very low interest rates, lose on their holdings.  A 12% drop in the dollar coupled with say, a 4% rate  means that the holder has lost 8%.  As in any market, there will be occasional rallies but the fundamentals are so bad that a vastly lower dollar appears to be a near certainty over the course of the intermediate term. 

Comments and questions, pro or con are welcomed as always.

Marko's Take


  1. When the dollar depreciates expenditures for the same rate of physical imports increase thus initially worsening the trade balance. It takes longer for the higher dollar cost of imports to reduce the quanitity enough to out weigh the increased expendtures per unit. Be patient.

  2. Hi Warren: I agree that there are often lags as substitutes must be found and contracts honored, but wouldn't our trading partners experience the same phenonenon, at the very least making the two somewhat offsetting?

    In any event, thanks for the insightful comment and please feel free to comment on any essay in the archives!


Take me on!