Thread: trade gap and how it will affect the economy

I have been reading articles lately that suggest that there could be some kind of a slow down or a "global crash" in an extreme case due to the trade gap. To better help explain what I'm getting at I have copied part of an article, which will go into detail and elaborate what it is I'm trying to ask.

My question is as follows: What everyone else’s take on this is and if anyone thinks that these imbalances could have an affect on the economy??(Article Below)

Thanks!

Jason

By Jon Markman

Last week, the International Monetary Fund released its semiannual Global Financial Stability Review, ahead of meetings this weekend in Singapore. The report was full of warnings that the risk of a global financial crash is increasing. This comes hot on the heels of a message from HSBC, one of the world's largest investment banks, that it has put the United States on recession alert.

So what is behind all of the doom and gloom? Chalk it up to the rising global imbalances in trade and foreign reserves that are boosting the possibility that a cyclical global slowdown could melt down into something worse. Not surprisingly, the U.S. economy is the key variable here.
Just look at the U.S. trade deficit, which surged to a record level of $68 billion in July according the Department of Commerce. As the U.S. deficit increases, it depresses the dollar, since more foreign currency is needed to buy all those imports while demand for dollars weakens. The flip side of this is China's record trade surplus, which is flooding that country in foreign currency -- boosting reserves and creating upward pressure on Chinese currency. A rapid depreciation of the dollar could add to inflationary pressures here at home, while inflicting substantial losses on foreign investors' dollar-based investments.

The IMF says that with the world fixated on the U.S. slowdown, not enough attention is being paid to these imbalances. The IMF scheduled multilateral consultation between the U.S., China and Saudi Arabia, to help find an orderly solution to the problem.

The managing director of the IMF, Spaniard Rodrigo de Rato, remains optimistic, however. He sees continued smooth sailing for the world economy, albeit with more ominous clouds on the horizon today than a few years ago. So you can see there continues to be a lot of debate among the smart money about the direction of the world economy. We need to monitor the data and commentary to guide our investment approach through the rest of the year.