U.S. Trade Deficit Shakes Consumer Confidence
Friday, September 2, 2011
As the U.S. and European economies destabilize under the pressure of debt, the global economy is leaning heavily on China.
“Consumers — historically and especially during times of economic decline — value price over quality,” says Karen Hogan, Ph.D., professor of finance. “China offers the U.S. and European economies cheap labor and affordable imports; we’re hooked on it.”
While conversation about the U.S. federal deficit dominates water cooler discussion, Hogan believes the U.S. trade deficit is an overlooked area of concern for consumers.
“According to global market theory, when a country increases the number of imports from another country, the cost of those imports should become more expensive due to an increase in the foreign currency value,” explains Hogan. The resulting value of the U.S. trade deficit should decline. This works to maintain stability in the world’s balance of payments.”
China, Hogan suggests, has buoyed global-market turmoil by tightly controlling its currency and prohibiting the value of its Yuan to rise. “China has long been under pressure from its trading partners to let its currency appreciate to help reduce its trade surplus,” says Hogan. “A move to reduce trade imbalances would help to stabilize a jittery market.”
If global markets continue along this path, economists fear inflation will rattle the Chinese economy while interest rates will skyrocket in the U.S. “Long-term revisions are necessary to keep a lid on consumer prices,” says Hogan.