U.S. trade surplus is trouble abroad
From statistics published by the Treasury and the Department of Commerce, it appears that as America's trade deficit decreases, purchases of Treasury securities by foreign investors tend to fall. Conversely, a deeper trade deficit increases demand for those securities.
This relationship exhibits a time lag of about one month. While appearing counterintuitive, this interesting result is grounded in the relationship between the dollar surpluses of foreign nations and their appetite for Treasury securities. Improvements in the U.S. trade balance result in a dollar scarcity abroad that could lead to surprising dollar strength.
In 1944, representatives of 44 Allied nations in World War II met in Bretton Woods, N.H., to hammer out a post-war international monetary system. It was agreed that the dollar would replace the dual Sterling/dollar system as the International Reserve Currency by which most international trade is conducted and products — like oil — are priced. The dollar would be convertible into gold at $35 per fine ounce, but only by central banks. This comprised the “gold link standard,” the last vestige of monetary gold.
As Europe recovered and business earnings mushroomed with access to the huge American consumer market, the United States accumulated large negative trade imbalances. These were magnified by dollar debasement — the deliberate lowering of the currency's value by reducing its gold support — and aggravated further by the deficit financing of the Vietnam War. Under President de Gaulle, France exercised its right to convert its huge dollar surplus from paper into gold. Unwilling to yield gold, President Nixon unilaterally defaulted on the dollar's gold link in August 1971. This heralded a further stealth default through dollar debasement. Meanwhile, increasing trade deficits were balanced by growing dollar surpluses in export-positive nations like Germany, Japan and eventually China.
This accumulation of dollars in the hands of non-Americans spawned a vast international market in non-sovereign dollars. It was termed the “Eurodollar” market, not to be confused with the euro.
Most dollar-surplus nations, like oil producers and corporations, stored their Eurodollars by investing in U.S. Treasuries and Eurodollar denominated bonds at returns higher than those on bank deposits. This supported lower yields for Eurodollar and U.S. Treasury bonds. As the flood of Eurodollars increased, deficit nations and corporations borrowed them in huge amounts.
The Federal Reserve now reports a substantial decline in U.S. trade deficits. As dollars are returned here to pay for increasing energy and manufactured exports, the pool of Eurodollars shrinks, leading to a shortage. Those requiring dollars are forced to sell Treasuries for cash to trade or to service their Eurodollar debts.
With U.S. trade possibly moving toward a big surplus, it may cause dangerous international dollar shortages and a Eurodollar debt crisis. A stronger dollar likely will cause problems for dollar debtors and, in the short-term only, for American exporters.
Dollar shortages likely will trigger increased Treasury sales and upward pressure on interest rates.
American trade surpluses may be good for American creditors, but will cause serious problems for interest rate sensitive debtor governments.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Central Catholic holds ‘emotional’ ceremony for Marino
- Boras: Alvarez’s power is too valuable for Pirates to let him leave
- Pirates showing interest in starting pitcher Masterson
- Steelers notebook: Opportunity awaits Boykin
- Pitt guard Robinson says free-wheeling offense is ‘a lot of fun’
- No shortage of offensive weapons for Aliquippa, Karns City in PIAA game
- Gorman: Aliquippa’s Jordan stars in any role
- WVU’s defensive linemen improving as pass rushers
- House votes to thwart power plant regulations
- Steelers’ Roethlisberger remains in concussion protocol
- Official: Plum SD trying to provide better communication, training in wake of sex scandal