Q2 2010 GDP revised down to 2.4% – Trade Deficit Widens

Trade deficit…

The trade gap in the second quarter widened to $425.9 billion from $338.4 billion, subtracting 2.8 percentage points from growth, the biggest reduction since 1982, today’s report showed. Imports grew at a 29 percent pace, while exports climbed 10 percent.

Having a trade deficit (importing more than exporting) puts constant downward pressure on a nation’s currency as more people are selling the currency than buying it (conversely, if a nation is a net exporter, there is a constant bid for the currency… you must first buy the nation’s currency before you can buy the output of the nation with the caveat being that the goods are priced in the local currency). A nation cannot run a perpetual trade deficit. At some point, all those exported dollars will come back to our shores buying up goods/services/assets. In other words the inflation (the increase in the money supply) is already present in the world… it is just that some of it is sitting in foreign bank accounts… as the reality sets in more each day that the USD is not a safe haven, those dollars will be looking for something to buy… the result will be a rise in prices and the only way to extinguish the dollar is for it to come home and buy something on America soil and it will eventually find its way back to the Fed (assuming they want to reign in the excess money supply at some point in the future).

Caterpillar CFO:

“You’ve got strong growth in India and China that provides demand for commodities,” Chief Financial Officer Ed Rapp said in an interview July 22. “Most of the mining is happening in the developing parts of the world.”



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