Yesterday we learned the U.S. trade deficit decreased unexpectedly. The surprise was not that imports fell for the seventh consecutive month, but that exports actually rose for the first time in six months, despite the strong dollar. Our trade deficit in 2006 was $681 billion compared with an estimate of only $373 billion this year. Nice trendline, indeed!
Early stage economies tend to grow by being export oriented. Mature economies tend to grow by being consumption oriented. The rest of the world has long envied our consumption based economy, which consumed their products. They were only too happy to continue lending us money to buy their goods. But, the world has changed . . .
To change our consumption orientation and again become an export economy, we need a cheaper dollar, which is the inevitable result of inflation. In other words, maybe we actually need inflation!