Sunday, October 7, 2007

Burgeoning US Trade deficit

Few points that states the origin of US Trade deficit era, the causes for it and my 2 cents:

The 1990's had been primarily an era of internet revolution. Buzzing business activities with myriad of interesting products in the market have lured customer spending. Corporate increasing revenue and cheering Walstreet gave more confidence to the economy which further increased customer confidence supporting increased level of consumer spending. With China helping the manufacturing sector and countries like India on service sector, the product prices reduced which further increased the GDP. I think since the pie was growing larger, the unemployment level has not been alarmingly high, though underemployment is a different issue.

Basically with some of the above happenings, people have been encouraged to borrow more, be it credit card or loan or home equities eventually adding to the trade deficit. The major benefit of trade deficit has been the lower cost of products ( though quality is a different issue). The major cost is that the nation, which in turn points to the people are eventually obligated to pay off these debt. While Monetarists like Milton Friedman argue that the dollar going out comes back with other governments buying US Securities, it is not just the dollar in question. It is the real situation and question if majority of people holding these debts will be able to make their ends meet from a long term point of view.

Few economists argue that these trade deficits will weaken dollar thereby enhance exports or the weak dollar would be helpful to pay off the debts etc. However, being called as the world's superpower, US should be proactive through saving and funds at discretion to act on priorities like medicare, social security, medicaid, security measures etc. Currently the reserves held by US is much lower that even some of the developing countries.

Overall, I think that the trade deficit in a short term is okay. However, if it consistently grows in the negative direction for few years, then economy is going in the wrong direction. While the GDP can be quoted as a defense, there are questionable statistics there as well, as stated by the Phantom GDP link. Just like recession measured by GDP decline, we need to have some phase in economy to measure consequent trade deficits :)

Thursday, October 4, 2007

IPod Index

Australian Bank has replaced Big Mac Index with IPod Index to measure global currencies and purchasing power. With reduced freight charges these days, it is surprising to see how the prices differ across the globe. The price details of the IPod 4GB Nano in different countries opens the opportunity for hedging based on the fluctuating currency rates. High tariff and tax policies are stated as the reasons for high prices in Brazil, Argentina. Details as stated in link below.

Details here