Low Interest Rates

Despite our endless budget deficits, we are blessed with low inflation and low interest rates. Seems like we’re defying gravity. We have also had continuous trade deficits since 1983. Think about that: how do we continue to buy more goods than sell for almost 40 years!? My estimation is that it is because the dollar is the de-facto trade currency for the world and as world trade grows, so grows the need for more dollars.

Biggest Export

I believe our biggest export product of the last 5 decades is actually currency. All we have to do is print dollars, ship them overseas and in return, we receive Mercedes Benz cars, Nike shoes, and McDonald’s plastic toys. I’ve read that more than 80% of all international trade is dollar-denominated, which is to say, when a Japanese company buys products from a German company, they use dollars to complete the transaction. Interesting to contemplate. If this is correct, there must be a connection between our ability to run endless trade deficits and endless budget deficits sans inflation.

It seems the Treasury borrows from the Federal Reserve at über low interest, which keeps interest and inflation low while greatly increasing the money supply because of this effect. As a manufacturing guy, I’ve seen the effects of automation and ever-improving manufacturing management techniques (lean, JIT, etc.) and believe these have been instrumental in keeping inflation at bay due to the productivity increases. But the worker productivity numbers aren’t good enough for that to make sense. Maybe my ego is telling me manufacturing is just all that. Ok, almost done here.

Inflation

What if the above is true? At the end of the day this will flatten or reverse. Maybe at some point the world will be “flat” and all markets will be homogeneous, as predicted in The Communist Manifesto, and world trade will grow, but only with the growth of the world economy, my soft landing scenario. Or maybe another currency such as the Yuan or the Euro will dethrone the Dollar as the world’s trade currency, or some pandemic will greatly reduce world trade causing a reduced need for the world trade currency. What happens then?

I’ll tell you what happens. Dollars not needed for trade come flooding back and our trade deficits turn into surpluses where our biggest import product is currency and we’re shipping Teslas and 777s overseas and importing dollars from overseas. Great for industry but extremely inflationary. Suddenly we have to live within our ability to produce, all while paying off debt, both trade and budget. Is this the next big bubble? If so, it will make all preceding bubbles look like a bubble bath. This one could be a tsunami of a bubble. While I am pretty confident this is how things will play out, like predicting the weather, I’m confident of my prediction but fuzzy on the timing.