At the foundation of any macroeconomic theory, the trade balance is one of the most important economic indicators. The trade balance is the calculation of the difference between how much a country exports and how much it imports. In the United States, the trade balance has been in the negative for decades due to the importation of oil and the reliance on the manufacturing abilities of other nations to produce our goods.
The Dollar as an Investment
The US dollar is actually an instrument for investing. When you hold US dollars in your bank account, your wallet or purse, or even by the process of holding stocks (which are priced in US dollars), you are investing in the economic production and vitality of the US economy. The value of any currency is not just set by the amount of the currency in existence, but also the confidence in economy backing the dollar.
Many countries, international businesses and banks hold their reserves in the US dollar, showing their confidence that the United States will remain politically and economically stable. However, should this belief disappear and investors shift to other currencies, the value of the US dollar would drop to show the weakened confidence in the US economy.
The Dangers of the Trade Imbalance
Look at the economy as a kitchen sink with many different faucets, and likewise, many different drain holes. The faucets and drain holes range in size and in the amount of water they add or take from the sink. If we were to make a model of the US economy, we would have very few faucets, as the United States exports very little. The biggest faucets would be pharmaceuticals, software, entertainment and films and military devices. At the bottom of the sink would be many large drain holes. Energy, consumer products and appliances make up a substantial portion of the imports reaching our shores china kitchen faucet suppliers.
Unfortunately, for America, more water flows out of the drains at the bottom than comes into the sink via the faucets. As such, what was once a sink overflowing with water (or money) is now dry. Each and every drop that comes out of the faucet is immediately sent down the drain. When the American kitchen sink runs dry, credit dries up and the economy comes to a standstill – much like the financial crisis of 2008.
Throwing the Stimulus Down the Kitchen Sink
When the sink runs dry, governments often bring in the five gallon buckets of water known as an economic stimulus. By infusing vast amounts of water into the sink at one time, the sink is again full, and the economy begins to move again. However, the existence of the water in the sink is only temporary if the drains are not plugged.
In a modern example, the $787 billion stimulus program in the United States filled up the economic sink again, but it will be less than two years before all of the money goes out the drains and into the coffers of other nations. On the other hand, the $500 billion stimulus package in China has been incredibly successful, as the nation maintains a health trade balance, and the fresh infrastructure investments have helped Chinese producers to become more efficient in transporting goods. While both governments enacted stimulus programs, China’s sink is overflowing, while the United State’s sink is on its way to becoming dry again.
Putting All the Ingredients Together
It is evident that the plugs won’t be restored to the US economy, which will further create a necessity for fiscal stimulus. Unfortunately, fiscal stimulus is paid for in two ways: inflation or debt, which both devalue the currency and make precious metals more expensive.
Profit is virtually guaranteed for those who invest early in precious metals. Any economic recovery in the United States will be short lived, as the fresh capital again exits through the unplugged drain. Silver is the perfect hedge for overconsumption, spending and a trade imbalance and should only rise in value as economic mistakes are repeated time and time again.
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