Trade Flows and Currency Flows.

In Money Supply on May 14, 2011 by CQCA

The Census Bureau recently reported that the United States imported $48.2 billion more than in exported in March, 2011. For the first three months of 2011, the U.S. imported $140.6 billion more than it exported. If this is multiplied by four (to equal 12 months), our trade deficit for the year will probably be around $562.4 billion for all of 2011. The number was $495.7 billion in 2010.

At some point, the United States economy is going to have to create wealth to sustain itself, instead of consuming the rest of the world’s wealth. The good news is that between February and March, 2011, the United States imported $1.6 billion more capital goods, and $2 billion fewer consumer goods. These capital goods can then be used to produce more goods in the future.

The problem with increasing U.S. exports is that it will both improve and worsen its economic condition, in the short run. When the United States purchases a foreign good, U.S. Dollars go abroad. This allows the U.S. to export inflation. If a foreign country were to begin purchasing U.S. goods, they would most likely use U.S. Dollars. Foreign governments, alone, held $3 trillion in U.S. Dollar denominated foreign exchange reserves at the end of 2010Q4, according to the IMF.

If the United States were to turn around its trade deficit at the end of the year by exporting enough to close the projected $562.4 billion trade deficit, that would be a direct injection of half a trillion Dollars into the U.S. economy.

The United State’s domestic money supply (M2) surpassed $9 trillion in April, 2011. Increased exports would increase M2 by more than 6%. Although the U.S. economy will be creating more wealth by exporting more goods, the inflation that was pushed abroad in the past will come back home in the future.

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