The Salt Lake Tribune has a business headline: “Trade
‘chasm’ gets deeper.”
Sounds pretty grim.
It could also read “Americans con foreigners to buy more.”
The relationship between capital investment in the U.S., the trade deficit and the value of the dollar is: CI/TD=$. Read this like the electrical formula: watts/amps=volts.
If the dollar is stable then foreigners can only increase
the trade deficit by investing more capital in the U.S. If the dollar is rising then it is because
foreigners are increasing their capital investment or the trade deficit is falling and vice versa. A falling dollar means declining investment or growing trade deficit. Simple.
Right now the dollar has stopped falling, it is stable, so
that means the trade deficit rise is being offset by an increase in capital
investment. Expect the U.S. bond market
to show strength with bond interest rates falling or the stock market rising or both.
The only exception to my formula is that a country can have inflation, caused by an extreme change in the flow of funds or by wrong-headed monetary policy; neither of which are occurring currently.