Why The Dollar Hasn't Collapsed Amidst The Trade Deficit

by: David Andrew Taylor

International trade narrowed ever so slightly for the month of June. Let's just call it basically flat. We're a long way away from the trades deficit being in positive territory, or from reversing the trend.

The plain fact of the matter is, we are a service related economy... no scratch that... a finance related economy, and it's cheaper for us to buy goods from overseas, while simultaneously being the world's financial and banking center. Investors from all over the world have been continually rushing into our financial markets. And for that, we are stuck buying their cheap wares:

If you think about it in those terms, these people are getting one helluva deal.

And that's why the dollar doesn't collapse (nor will it) every time we buy something from overseas. The businesses on the other end are accumulating the cash they receive from us and investing it right here in our markets.

Is that a good idea? You betcha.

Think about it: What does China produce? Cheap t-shirts. Inexpensive, low-tech wares that we gobble up at prices far lower than we would not be able to compete with because our economic standards of living are far higher than these countries.

What do we produce? Think high-tech. Just look at the products produced by the biggest high-tech companies out there.... Microsoft... yeah, I said that. And of course Apple. And every other company out there that produces a product well beyond the basic necessities of mankind.

If you were to value one widget produced by one American worker, it could be valued in the hundreds or even thousands of dollars. If you were to value one widget produced by one worker over in these regions, it might be worth only $1.25. Who would you rather invest in?

It's the trade deal of a lifetime.

Now you know why the dollar hasn't collapsed because we are buying products from overseas. It won't happen. And you can tell any other pundit out there that keeps saying the trade deficit is going to be the death knell for the U.S. to start thinking outside the tiny box they live in.