The Trade Deficit

Is at an all-time high and exceeded expectations once again. According to the WaPo,

The deficit, which has steadily deteriorated, was 2.7 percent higher in February than the previous record of $59.42 billion set in November.

What does this mean? Oh, not much, just that oil prices are continuously increasing and that Chinese imports are still growing. Who's responsible for this? The American [over]consumer. As Stephen Roach says,

The global economy is increasingly supported by a unipolar consumption dynamic -- riding on the back of saving-short, wage-constrained, and overly-indebted American consumer.

This evidences what we should have been worrying about long ago - American over borrowing and consumption, which is already leading to a fall in the dollar and a financial burden on Europe. There is no question that we're heading for a realignment (recession) of some sort, but it is unclear whether the landing will be soft or hard. Financial markets might be able operate under efficient market theory, but I do not believe that markets by themselves are an accurate measure of an economy's well-being, and they cannot anticipate the distorting effects of political legislation. For instance (Roach again),

Politicians need short-term results to withstand the howls of protest from equally myopic voters. And so they intervene in an effort to temper the impacts of global imbalances on their constituents. This then sows the seeds for trade frictions and protectionism -- always the weakest link in the ideal world of globalization.

This opens up an entirely different can of worms. If protectionism takes hold, and it looks like the U.S. is and now Europe might begin to because it has borne the brunt of the dollar decline. If Asia continues to try to maintain parity with the dollar Europe might be forced into protectionist tactics, or more familiarly known as "voodoo economics." If this happens we would certainly not be heading toward a soft landing.