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The two classic policy responses to hard economic times are interest rate cuts and currency devaluation. Devaluation spurs exports and domestic production allowing a country to trade its way to growth. When confronted with a global credit bust ala the post 2007 period end user demand is reduced, often sharply, due to a combination of debt saturation, reduced earned income and a reduction in available credit all classic deflationary credit bust. In the post 2008 period global trade has declined sharply and in fact trade growth went negative last year, bucking a decades long trend of increasing trade volumes. The Dollar’s recent strength has not brought with it the expected increase in imports as Americans purchased more foreign made goods but it did bring the expected decline in exports. Some of the import decline can be traced to oil and related compliments of fracking but looking at the bigger picture and the trade decline is a symptom of a bigger problem. Same is true for the anemic business investment in the post crisis period. As is the data on consumer debt and interest rates. Debt enhanced consumption and economic growth will continue so long as income can stay ahead of debt service costs. Debt saturation as mentioned yesterday, an inability to reduce borrowing costs compliments of Zero Interest Rate Policies or ZIRP and falling earned income are a toxic mix. Yet our economic and political leadership pushes more debt for all its worth trying to solve the problem of too much debt with even more debt. Well the best definition of insanity is doing the same thing expecting a different outcome.


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