Debt, Deficits, and the Death of the Dollar

Debt, Deficits, and the Death of the Dollar

By Jason Simpkins | Friday, February 6th, 2015

The dollar has been strong recently, no doubt.

But don't get conned into believing this short-term strength equates to long-term stability.

The fact is, the dollar is still doomed. It just so happens that, at the moment, other fiat currencies are looking worse.

It's all relative. The dollar only looks good when you compare it to other flawed currencies, like the euro or yen. But at the end of the day, it's still just a debt instrument — and one that's increasingly at risk.

Because we're so busy celebrating our emergence from the 2008 financial crisis, we've lost sight of the debt and deficits that are steadily building.

Basically, we're digging a hole that's much bigger than the one we're supposedly climbing out of.

Nothing is Free

What you have to understand is that a strong dollar is a double-edged sword.

It makes commodities cheaper and it increases U.S. purchasing power. But it also makes our exports more expensive for other countries. And it makes our debt harder to finance.

Case-in-point: The U.S. trade deficit rose 17.1% in December, hitting a two-year high of $46.6 billion.

Exports fell 0.8% to $194.9 billion, while imports increased 2.2% to a record $241.4 billion.

In fact, the import-export gap between the United States and China and the EU — its two biggest trading partners — is the biggest it's ever been.

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The deficit with China rose by 23.9% to a record $342.6 billion. And the deficit with the EU jumped 12.5% to a record $141.1 billion.

For all of 2014, the total U.S. trade gap widened 6% to $505 billion, potentially shaving 1% off of GDP growth.

This trend is poised to accelerate, and not just because of the dollar.

There's also the Trans-Pacific Partnership (TPP), which could be ratified later this year.

The TPP is a free trade agreement with 12 U.S. trade partners in the Pacific Rim. It would lower tariffs on U.S. exports, but it would also push for more privatization and deregulation abroad.

That opens up the door for Western multinationals to transfer their operations overseas, where labor and resources are cheaper.

This, of course, is the notorious failure of NAFTA, an agreement that has cost the U.S. more than 1 million jobs over the past 20 years and exacerbated our trade deficit.

For instance, maybe you've wondered why so many car companies have manufacturing plants in Mexico...

Well, when NAFTA was passed, U.S. car companies, like General Motors, set up manufacturing plants in Mexico where land and labor come cheap. Then they simply imported their vehicles back into the United States at no cost. Other foreign companies, like Kia, Nissan, and Mercedes did the same.

Prior to NAFTA the U.S. actually had a trade surplus with Mexico and a trade deficit with Canada of just $26 billion. Now, our combined deficit with both those countries exceeds $177 billion.

The same is true of the Permanent Normal Trade Relations agreement with China, which cost some 2.7 million U.S. jobs.

Basically, all these free trade agreements do is lure U.S. companies overseas, where they can evade taxes, skirt labor laws, duck environmental regulation, and sell our goods back to us at a higher profit.

That's good for U.S. multinationals and the people who run them, but not much else. And it's certainly bad for the country's balance sheet. These agreements siphon off tax revenue, reduce exports, increase imports, and destroy jobs.

Combined with a stronger dollar, which makes U.S. exports more expensive, the end result is larger trade deficits and more borrowing.

And we're only talking about the annual trade/budget deficit here. When you zoom out and look at the totality of the national debt, it's an even scarier picture.

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