Tuesday, September 22, 2009

Trade to Boost Economy for Years to Come

The long decline in the US Dollar has made US goods cheap. In recent months, trade has been rising rapidly. Most importantly, exports have been rising even faster than imports. Trade is going to boost US economic growth for years to come.  If one looks at US made computer chips, the ones offered today are many times as powerful as the ones offered a few years ago. The innovations produced in America cannot be purchased from anyone else. Countries such as China, which hold large quantities of US Dollars, can trade those dollars for very powerful computer chips that will increase productivity in China. We are in a win-win economic cycle.

Central bankers are already backing away from fighting recession. Real interest rates have rising because the price of manufactured goods has fallen. Central bankers suddenly have the luxury of not having to fight deflation. They may not be ready to increase discount rates now but the next move in rates will be up, probably a year from now. As can be seen in the following chart by capital risk fame, the peak in unemployment is normally a year or more before the first hike in fed funds.

While the odds of passage of big government programs such as healthcare and cap and trade are growing slim, the statement by Obama that his plan will not contribute one penny to the deficit is good; not plausible, without massive tax increases, but good. In my opinion, Gold Bugs have enjoyed perhaps the last move of about a 10-year run. To fight recession in 2000-2001, Greenspan took real short rates to negative levels and kept them there for about 3 years. If Obama sticks to his word and actually works to lower the government deficit, Bernanke and crew will have an easier time of keeping inflation under control. Real interest is to gold like acid is to skin, it burns.

No one can predict the future, but the US is set-up for a period of sustained growth. Again, the multi-year decline in the value of the US dollar has made our goods cheap. We will have to sell a lot of goods to soak up all the dollars that are floating around the world. Solid growth will permit the FOMC to hold our money reigns tight. Commodity prices will stay in line, labor is in excess supply, there is room for a long expansion. Boom!