The most recent US trade statistics indicate a record trade deficit, at $70 Billion per month and growing. It bears mentioning that $22 Billion of that deficit is with China, alone. At the current rate of growth, the deficit will likely cross the symbolic $1 Trillion dollar barrier in the next few
years. Despite this devastating development, the USD hardly budged in forex markets, which suggests that traders remain unfazed in their belief that foreigners will continue to finance the deficit, regardless of how large it grows. However, the current USD valuation runs contrary to the one of the most fundamental laws of classical economics: purchasing power parity. While traders may believe that they can indefinitely forestall the collapse of the USD, they are only making it more likely that a “hard landing” will take place.
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