U.S. Dollar

The USA is the country with the biggest trade deficit in the world. How is it possible that a country with immense debts is the world strongest economy?

In the early 60’s the U.S. had a positive trade balance of their imports and exports of $3.508 billion. Now 2007 they had a deficit of $700.258 billion. The explanation is globalization. The global interdependence already started in the 60’s and dramatically increased in the 80’s and the following years, till today.

As we learned in class the process of globalization changed the economic markets a lot. Instead of producing goods and services, developed countries as the G7 (USA, Japan, Germany, Great Britain, France, Italy und Canada) are focusing on invent, design and marketing products and services. Countries like in Asia, China, Mexico and Brazil are the ones which are producing now. Before the U.S. economic strength was to manufacturing goods to than exporting them in other countries. That is what have them made successful and accepted in the whole world.

According to the fact that it is cheaper to produce products and services in undeveloped countries, companies moved abroad to reduce cost and to work more efficiently. As a result the U.S. has to import all the goods to satisfy its market, therefore imports increased especially from china and exports decreased, because less is produced within the country. This trend climbed as much as the development of globalization.

The statistics of the U.S. trade balance sheet confirm this trend. Till the end of the 60’s the trade balance was still positive, after in the 70’s it became a deficit. As globalization moved on the deficit increased even more, with a little break in the early 90’s were the last big recession hold on. In 2007 there is a deficit of $700.258 billion, which is not the highest one after 2005 and 2006 according to the American Credit Crunch.

Back to the fact that lot of companies moved to undeveloped countries to reduce costs in labour, land and machinery is the explanation how the U.S. can still survive with the trade deficit. For example China, the exports of the companies, who are producing there, are going to the Chinese banks. The banks invest this money in American gilt-edged securities, shares of companies and shares of mortgages. On this way the money comes back to the developed countries, because they are attractive to invest in.
Especially the U.S. has an advantage, because they have the world currency, so everybody, mainly undeveloped countries due to to the fact that they are more dependent, is interested in the dollar and therefore invest in the USA. According to this, the financial income was $900 billion, which is circa $200 billion higher than the trade deficit. However the United States could keep the interest low that American citizen borrows money to consume products from abroad.

The circle makes the dollar strong and valuable, because so many countries are investing in it. The downside is the highly dependence on the investors and consumption of American citizen. If the market is not interesting enough anymore the value of the dollar will dramatically fall and as well if the consumption is going down, because the exports will be lower, therefore the undeveloped countries have less to spend or invest.

It is hard to say whether closed linkage to others is good for the dollar or not. As soon the circle is flowing it is good stabilized and everybody is benefiting from it. On the other side it has to take in consideration that market values in terms of shares can not growth the whole time, they can not increase their value to infinity and soon there is no growth in U.S. market shares there will be no profit and therefore the trade deficit can not balanced by the financial system. Than the government or the FED has to increase interest rates and this again will decrease consumer spending and so on. Then fact is that a bigger deficit would decrease value of the dollar.

To stabilize dollar, the U.S. government should try to reduce the overseas military expenditures and transferring cost of maintaining bases to foreign governments.