U.S. trade surplus is trouble abroad
By John Browne
Published: Saturday, Oct. 12, 2013, 9:00 p.m.
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 email@example.com.
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