US trade deficit and its implications......

Does US trade deficit really matter or is it just notional in value?

quite some back, I had heard a theory saying that US does not pay anybody for buying goods from them rather prints money and buys more goods.

The logic behind that was very simple. "US imports more than it exports. All the foreign trade is primarily done in US Dollar, i.e. the currency of international trade. US when imports goods pays in dollars and when exports receives dollar. When in deficit, there is excess outflow of dollars. now, who owns dollar? who creates dollar? US itself owns dollars and creates dollars. So to pay for excess deficit, what it needs is just print more dollars and give to the exporters. Earlier when the whole monetary system was basedojn gold, this would not have worked but, after gold standard was abolished, Central banks of any country print as much currency they like without any backup for the same."

Though the above theory stands fine there are some comple issues involved with this like what will happen when money suppy increases witght the amount of dollars provided by the apex bank of US? will we have another run of hyperinflation? what if the US is unable to honour the rights of the holders of the US currency?

Even now, most of the US currency is held by the foreigners & not by the US nationals. Most of the forex assets amassed by large number of developing countries are in fact invested in US securities.almost 40-60% of the Chinese foreign exchange tranche of $1.2 trillion are invested in US state bonds and treasuries.

One study recently concluded that though US is having trade deficit, it has positive balance of payment situation, this is due to the fact that monies invested in US is in far excess of the trade deficit of US.

Now let us analyse the international relations in trade and effects in case of emergencies or crisis.

The world markets and its costituents are linked with each other in such a complicated manner, that it is very difficult to analyse the precise effects of any crisis. The latest meltdown of American subprime markets affecting a French giant, which triggers of stockmarket meltdown across the planet complexities of controlling or analysing the current markets.

Whenever a prominent country, exchange, institution has financial crisis, then all the other constituents try to make sure that its effects have minimalist affect on their operations.

What happens when two countries on tradable terms harbour animosity and cease to have operations with each other? What happens when they are at war with each other?

This results in each country describing the other part as enemy country. The first thing is all the contracts entered between own country and enemy country become void. None of the parties are liable to pay each other the debts owned by them. All the funds owned by them of the other party are taken over by the state.

suppose such situation arises between US and any one of the other countries, then all the debts owned by US will not be paid by them. All the forex invested by the other country in US securities will be rendered junk. no one will purchase them and US won't honour them. The external debt position of US will turn very favourable overnight. All the goods already imported by them will not be returnable and the debts incurred for the same will be non-payable. All the amounts invested by companies from other country will be taken over by the state. So all the capital invested by other country will be nationalised.

So though in theory large amount of external debt, huge trade deficit, they can always turn the tide by merely converting that country into enem,y state.

Maybe this was the reason though Iraq did not possess any Weapons of Mass Destruction, though no proof was available to US to prove the same, though cost of war on Iraq was in far excess of cost of oil available from Iraq, they went ahead. The reason was, at one point of time Iraq was one of the most modern states in the Gulf and it was exporting oil and importing finished goods, but it also had a thriving industrial base. this is what was feared by US. that monies spent by them was not utilised for importing goods but to strengthen themselves. Theoretically every oil rich country which will try to reduce external dependence will face the fate of Iraq.

And above analysis confirms that US being really militarily supreme can turn tide ot its side.