Back in the pre- bubble days of the late 1980’s, when level heading thinking
still prevailed, a 14% increase in the monthly trade deficit to a new all-time
record high, blowing away the census forecast by over 10%, would have sent
U.S. financial markets tumbling. It would have hit the currency markets first,
than quickly spilled over into the bond market, sending interest rates soaring,
leading to a major sell of in the stock market. But such was not the case today,
as forex traders continue to ignore yet another in a string of horrific trade
deficits, much as tech “investor” ignored similar, and equally significant,
poor earrings reports (or lack thereof) back in the tech mania. In fact, ridiculous
arguments commonly advanced explaining away the trade deficit as the result
of weak economies abroad rather than fundamental problem at home, are strikingly
similar in their absurdity to arguments advanced by tech traders during the
bubble, as they rationalized preposterous valuations. This complacency in the
face of over whelming evidence of a fundamental problem with the consumption
and borrowing based U.S. economy, is even more remarkable than the data itself.
Making new multi-year lows this morning, the dollar has lost about 20% of its
value against the world’s major currencies without any sense of panic from
America’s foreign creditors. This head-in-the-sand, this time its different
attitude, is again similar to the reaction of tech investors as the NASDAQ
began is slide from its 5,000 peek. How much wider will the trade deficit have
to grow, and how much lower will the dollar have to fall, before reality finally
sets in? My guess is that these questions will not remain rhetorical for much
longer, and that investors are not going to like the answers. Americans have
sown the wind with reckless indebtedness, over-consumption, and mindless mal-investments
in profitless ventures, and are ill prepared to reap the whirl wind.