Once again the United States bought a bunch of things from the rest of the world. $68 billion more than it sold to the rest of the world.
Market Watch, Dow Jones's free website, covered the
story:
WASHINGTON (MarketWatch) -- Higher prices for imported oil pushed the U.S. trade gap of goods and services to a new record in July, a government report showed Tuesday.
The nation's trade deficit widened by 5% in July to $68 billion, the Commerce Department said. This beats the previous record of $66.6 billion set last October. Read full government report.
The U.S. imported $20.8 billion worth of crude oil in July, the highest amount on record. The import average price per barrel of crude oil was a record $64.84 in the month.
The widening of the deficit was larger than expected. The consensus forecast of Wall Street economists had been for the deficit to widen to $65.4 billion.
The markets didn't care. So far the dollar is up on foreign exchange trading and the stock markets are also up. If no one there cares, should we?
Right now, the US has the luxury of having the world's favorite reserve currency. As Wikipedia notes:
The United States dollar is the most important reserve currency in the world today. At the start of 2006, 66.3% of the identified official foreign exchange reserves in the world were held in United States dollars, 24.8% in euro, 3.4% in Japanese yen, and 4.0% in pound sterling, according to the IMF. [1]. For this reason, the US dollar is said to have "reserve currency status", making it possible for the United States to run significant trade deficits (financed by seigniorage) with limited economic impact (see currency crisis) as long as the major holders of reserve currencies do not issue public statements suggesting otherwise.
So, we get to hand out IOUs, denominated in dollars, because people want their IOUs denominated in dollars. As long as people want dollars, we can keep keep buying things on credit at no interest from the rest of the world. Our trade deficit is no problem today (as long as your job didn't disappear because of massive imports from China or the huge oil bill we keep paying), just as it was no problem to get a home loan two years ago.
Can we keep spending three dollars on the world market for every two that are spent by other countries in the United States? Not when it's 5% of our GDP. It appears that the world economy can handle a real trade deficit of 1-2% of US GDP, because the dollar is the reserve currency. The increase in dollars abroad is fine because the world economy is growing fast enough for the central banks of other countries to want to have a modest increase in dollars, but they don't need the dollars to increase faster than economic growth.
Why didn't the markets care, then? Partly because they expect the Fed to continue to increase interest rates at the next rate meeting. Partly because the Euro economy isn't driving very hard. Partly because China decides what the price of its currency is with its 'controlled float'. Partly because the Japanese economy isn't doing too well either. No one wants to tell a drunk to go home when he's buying rounds for everyone.
Long-term, of course, these results are not good for us. The United States' trade deficit will eventually be paid for, one way or the other. Either we have to sell stuff that others want to buy with the money we already sent them, i.e. lower standard of living, or we have to let the price of the dollar drop until there is a balance in demand and supply for dollars, i.e. inflation for imports. Neither are appealing, neither can be avoided. Both can be delayed for some period of time.
At least we're helping the economies of the rest of the world.