trade surplus

Blog

Aperture51/Shutterstock

The Dollar May Remain Strong For Longer Than We Think

Why demand for it is higher than other fiat currencies
Tuesday, September 16, 2014, 9:50 PM

I have long been a dollar bull, not for any over-arching reasons based on inflation, deflation, rising geopolitical multi-polarity or any of the other issues that touch on the dollar’s valuation vis-à-vis other currencies. My analysis focuses on a few basics:  the dollar’s status as the global reserve currency, Triffin’s Paradox (a.k.a. Triffin’s Dilemma) and global capital flows into the dollar and dollar-denominated assets such as U.S. Treasury bonds. » Read more

Insider

Micha Klootwijk/Shutterstock

Japan's Economy Is Shattering

Abenomics is fast proving to be a costly failure
Monday, April 28, 2014, 10:09 AM

When you are a fully-industrialized island nation that makes its living in the world by importing raw materials, fashioning them into useful exports, and collecting the difference as your profits, then you simply have to run a trade surplus for the model to work.

Which means Japan is in big trouble: » Read more

Blog

Bruce Rolff/Shutterstock

When Every Country Wants to Sell, Who Buys?

The world is trapped in a quest for 'Demand'
Tuesday, April 22, 2014, 12:14 PM

Understandably for the US, which sustained a consumption supercycle for several decades, the post-financial crisis period has kicked off a new trend: Americans want to consume less, and make more.

Americans want to own less stuff, use less energy, and produce their own goods. In short, Americans want to sell» Read more

Insider

Why Gold & the Dollar May Both Rise from Here

An important possibility to consider
Tuesday, November 13, 2012, 10:05 AM

Executive Summary

  • Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
  • Why the euro's troubles have been good for the price of gold
  • Why the dollar can strengthen despite the United States' wishes
  • Why the future may well see the price of both gold and the U.S. dollar rise

If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.

In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy.  Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy. 

Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.

Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status.  As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.

Here is the Wikipedia entry on Triffin’s Paradox:

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

This leads to some startling conclusions that many have great difficulty accepting... » Read more