By Dirk van Dijk of Zacks.comNEW YORK ( TheStreet) -- What really drove the increase in the trade deficit this month was the non-oil goods side. That deficit rose to $32.31 billion from $27.78 billion in April and $22.38 billion a year ago, increases of 16.3% and 44.4%, respectively. The rise is most likely related to the strength of the dollar in recent months as a result of the crisis in Europe. This is the principal transmission mechanism for the trouble on that side of the pond to affect the U.S. economy. The trade deficit really is a much bigger problem than is the fiscal deficit. It is the trade deficit that is responsible for our being deep in debt to the rest of the world, not the budget deficit. That is something that cannot be argued, it is simply an accounting identity. For every dollar of goods and services we buy that is more than the amount of goods and services we sell abroad each month, we have to either be selling off assets or going into debt by that amount, dollar for dollar. This month, we effectively sold off Kraft Foods ( KFT); if the deficit is the same size next month, we will effectively sell off Bristol Myers ( BMY). How much longer before we don't have anything left? Actually it is mostly T-bills and notes that are being sold abroad, but the key point is that it is the trade deficit, not the budget deficit, that drives how far we are in hock to the rest of the world.
Inflation or Deflation?The strength of the dollar in recent months is not a good thing. We need for the dollar to slowly fall in value relative to other major currencies. Yes, that would result in higher inflation, but right now, more inflation would be a good thing -- the economy is on the edge of deflation. Deflation would raise real interest rates and make it impossible for many debtors to be able to repay their loans, leading many of them to default. Deflations lead to depressions, and need to be avoided at all costs.
The problem is that every country in the world wants to be a net exporter. Unfortunately, unless new trade routes are opened to Mars, that can't happen. For too long, the U.S. consumer has been the buyer of last resort, sucking up the excess production of the rest of the world.