In August, the U.S. trade deficit showed an unexpected drop of 3.5%. This shrinks the deficit to a mere $30.7 billion – rather than the $33 billion economists expected. Oil prices surged, but the amount of shipments fell precipitously. The increase in exports suggests that the global economy is working its way out o the doghouse.

Exports of goods and services pushed 0.2% higher in August to $28.2 billion. This was the fourth consecutive month of increases. American farm products, cars and parts, industrial engines and telecommunications equipment sales all contributed to the small upward move.

How do we know that world trade is loosening up? One indication is the U.S. trade deficit. Unfortunately the U.S. has been running a growing trade deficit for the past two months. You may be asking, what causes our trade deficit? The U.S. trade deficit is caused by importing more goods than we export. In April the trade gap widened by 2.4% from March to $29.2 billion. This follows a 10-year low in February.

The trade gap narrowed by 53% from a year ago when world trade collapsed from the global recession. The slight gains in the past two months indicate that some improvement is occurring in world commerce.

Many economists agree the U.S.'s pronounced recession, and the global recession, to some degree, were triggered by a series of imbalances. One of those imbalances is correcting now.

The U.S. trade deficit declined again in December 2008, by 4%, to $39.9 billion -- the lowest level since February 2003 -- on a substantial decline in imports, the U.S. Commerce Department announced Wednesday.

Further, for all of 2008, the trade deficit narrowed to $677.1 billion from $700.2 billion in 2007. In 2008, exports increased 12% to $1.84 trillion, while imports climbed 7.4% to $2.52 trillion.

The previous U.S. presidential administration preached a great deal about a 'strong dollar policy.'

Unfortunately, almost no actions practiced by the administration supported that goal.

Concerning the federal budget, a decade of deficits has really hurt the dollar's value. A $1.3 trillion tax cut in 2001 ended the balance budget era of the late 1990s, and subsequent increases in defense spending for the Iraq and Afghanistan Wars -- combined with a lack of a tax increase to pay for that additional spending -- soon led to +$200 billion budget deficits. After swelling to $300 billion, the bank bailout and related legislation would push the deficit over $500 billion, according to the Congressional Budget Office, and it's projected to top $1 trillion this year and in fiscal 2010.

Oh, relax, it's only January.

That was one China expert's evaluation of the impact of U.S. Treasury Secretary-designate Timothy Geithner's comment that he believes China is "manipulating" its currency.

China's currency, the yuan, which China allows to trade in a tight band, and not float freely in the currency market, has long been been viewed by Congressional lawmakers, business executives, and analysts as a tactic by China to artificially depress the value of its goods, in order to increase exports sales. Critics argue China is creating an unnatural competitive advantage for its companies. The yuan closed Thursday at 6.8380 to the dollar.

China counters that it must keep its currency fixed to protect its young, immature industries and developing economy.

Taking it with a grain of salt

Further, while the Bush administration did not push the currency issue much with China, and Geithner's comments suggest otherwise, economist David H. Wang, a China expert, said China is likely to disregard Geithner's comments.

"China's leaders have developed an increasing sophistication regarding the American political system," Wang said. There is a phrase you hear a lot now in Beijing that translates roughly to 'Don't pay attention to any comments from America from November thru January.' And, for the most part, that's a good rule to follow."

Can the U.S. government run $1 trillion budget deficits for two, three years? Indeed it can, Financial Times columnist Martin Wolf argues, and the deficits can even be higher, for a while. After that, there's more work ahead.

The specter of $1 trillion budget deficits may be vociferously opposed by Republicans and other economic conservatives, but Wolf, in so many words, says what other choice does the United States have? What would be the alternative? Simultaneously raising taxes now to lower the deficit? Hardly prudent. Doing nothing? Another dreadful idea. So, it's prime the pump, or sit there at the well and await nothing.

Up ahead: two bigger tasks

What's more, Wolf sees two additional tasks (structural changes) that are just as important to the goal of U.S. economic recovery -- but that may be even harder to implement: removing toxic assets from the banking system and reducing the U.S.'s structural current account deficit (the trade deficit).

The first is the forced write-off of bad assets, fiscal recapitalization of the banks, or debt-for-equity tactic, and it should be done comprehensively and quickly. Slow, gradual bad-debt reduction is not the correct policy, Wolf argues, as it would delay the economic recovery.

There have been almost no positives in the U.S. recession that has resulted in millions of job losses, and also hurt corporate revenue and earnings, most economists agree.

But at least one metric has moved in the correct direction: the U.S. trade deficit, which declined 29% in November 2008 to $40.4 billion on a record decline in imports, the U.S. Commerce Department announced Tuesday.

Economists surveyed by Bloomberg News had expected the November 2008 trade deficit to total $51.5 billion.

Imports declined a record 12% to $183.2 billion -- the lowest level in more than two years -- pushed lower by a large drop in imported oil prices.

Exports dropped 5.8% to $142.8 billion, on declining demand for industrial supplies and capital goods. The October 2008 trade deficit was revised lower to $56.7 billion from the previously released $57.2 billion.

During the past four years, as gasoline first soared above $3, then $4, the United States transferred more than $2 trillion is wealth to oil producing nations, to which OPEC says, "Thank you very much."

However, in recent months, the price of oil has collapsed with the onset of the U.S. and global recessions, and oil now appears destined to test $30 per barrel - - and probably lower levels - - in the year ahead. Oil traded Wednesday down $1.53 to $37.43 per barrel, with regular unleaded gasoline averaging about $1.55-$1.75 nationwide. Incredibly, the stunning turn of events in the oil market means that energy from crude is now 'comfortably priced.'

Still, with three oil shocks (1973-74, 1979-80, 2007-08) having contributed to or directly causing three U.S. recessions, oil's drift back toward 'comfortable' levels re-opens the door for a policy debate: namely, should the U.S. let its economy remain vulnerable to prices swings in this volatile commodity or should it consider a tax to fund alternative energy sources for transportation.

Is a $10 oil tax up ahead?

Economist Peter Dawson said it seems almost unfathomable that the American people and Congress would be willing to ship $100 per barrel (or more) in oil revenue to foreign governments, and not to its own government, but that is precisely the case.

Few economists deny that the global economic order that dawns following the financial crisis will be different from the pre-crisis order.

And a key difference is likely to be consumption patterns -- namely the development and expansion of middle classes in younger economies as a source of demand.

The export economy's downside

Emerging market economies have learned/are learning an all-too-painful lesson regarding the vulnerabilities -- or the downside -- of an export-based economy: if for some reason that foreign demand wanes or dries up, your economy has a problem. A big problem.

With oil prices cut in half and gasoline near (or below) $2 per gallon, is now a good time for the U.S. to end its century-long addiction to oil?

The topic was raised by none other than the 'liberal bastion' of The Wall Street Journal Monday (subscription required0 with energy analysts and policy makers weighing in.

BloggingStocks Monday asked Energy Trader Jim Dietz to evaluate some of the major recommendations discussed.

• Four-day work week: "It's possible, but the best plan would be voluntary, allowing companies to opt in/out and adopt plans that meet their production needs," Dietz said.

• Mandated higher MPG for vehicles: "This is almost certain to be proposed by President-elect Obama, and will likely pass the Congress. It will reduce gasoline and diesel consumption."

• Mandated flex-fuel cars: "Another measure likely to become federal law and it would take pressure off oil consumption."

• Tax credit for fuel-efficient vehicles: "Another oil saver, and it stands a better than 50% chance of being passed by the next Congress."
  

• Federal funds for next-gen vehicle: "This will likely be included in any rescue package for General Motors, Ford, and Chrysler. A next-generation vehicle would be a game-changer, energy wise, but it's years away."

There have been few bright spots as the United States attempts to battle back from almost a decade of policy errors, but one positive trend continued Thursday: the trade deficit continues to decline.

The U.S trade deficit narrowed in September to $56.5 billion -- its smallest total in almost a year -- as the plunge in oil prices decreased the nation's bill for imported oil, the U.S. Commerce Department announced Thursday. Economists surveyed by Bloomberg News had expected the September trade deficit to total $57.0 billion. The trade deficit totaled $59.1 billion in August.

Imports fell a record $12.5 billion to $211.9 billion in September, while exports declined a record $9.9 billion to $155.4 billion. Further, during the past year, the real trade deficit has declined 19.7%, with real imports declining 6% and real exports dipping 2.3%.

Economist Peter Dawson said the major factor in the continued reduction in the U.S. trade gap is the plunge in oil prices, but U.S. consumer behavior also is playing a role.

Time provides the advantage of not only additional events, but also the ability to the compare these events to conditions and issues in previous eras -- an argument against 'instant-analysis' and a major reason my Ph.D. advisor said, "Don't study any public official's decisions until he or she has been dead for 20 years."

Hence, time is naturally providing more evidence and perspective on the recently-ended period of global economic growth, and increasingly the evidence is showing that it was a global economy of unsustainable imbalances -- balances that policy makers mistakenly ignored.

2001-2007: a policy void

First and probably foremost there was the oil price imbalance. Whether they were driven up by speculators, by institutional investors seeking a return on equity, global energy demand, and/or by other factors, economists had warned for years that the U.S. and global economies could not continue to grow at adequate rates with oil above $80 per barrel. In fact, every previous oil shock in the modern era was followed by a recession in the United States. Still, little was done from a policy standpoint to stem oil's price rise.

Similarly, the U.S.'s then-increasing trade deficit, a good part of which had been fed by purchases of imported oil, and the notion that U.S. consumers could serve perpetually as the growth engine of the export-oriented developing world, was unsustainable, given stagnant U.S. incomes, and its nadir savings rate. Yet little was done to address this imbalance.

What's the post-2008 U.S. Presidential Election dollar outlook and the dollar strategy?

Well, more than likely, the dollar's fate will be largely determined by macroeconomic factors, as well as by fiscal and monetary policy, along with the overall risk appetite/risk aversion climate that hinges on the status of the global financial crisis.

As any economist or currency trader will tell you, that's a full plate of variables, which only underscores the complexity (and difficulty) in determining the direction of currencies.

Nov. 4 election will help determine dollar's fate

Still, fiscal policy plays an important role, and with the aforementioned in mind, look for the following dollar pattern depending on the Tuesday, November 4 Election Day outcome: If U.S. Sen. Barack Obama, D-Illinois, wins, the dollar is likely to strengthen, long-term. If U.S. Sen. John McCain, R-Arizona, wins, the dollar is likely to weaken, long-term.

Currency Trader Eric Simpkins outlined the Obama scenario. Although U.S. budget deficits will initially be high as an Obama presidency begins, an Obama win implies a Democratic Party majority in the U.S. Congress, which will make it easier for Obama to raise taxes on upper income groups, basically those Americans earning more than $250,000 per year.

"Obama's tax increase will cut the U.S. budget deficit and get the revenue and spending lines heading in the right direction, together, which will cause the dollar to rise," Simpkins said. "The U.S. recession will mitigate this somewhat, but that economic negative will be offset by the fact that Europe and other regions will be in recession, too, and will likely recover later, putting pressure on those currencies."

Is the dollar's status as the world's reserve currency coming to an end?

It could be, if present trends driven by corrective measures taken to stem the global financial crisis continue, in the view of one monetary official.

European Central Bank council member Ewald Nowotny believes a 'tri-polar' global reserve currency system is developing among Asia, Europe and the United States.

"What I see is a system where we have more centers of gravity," Nowotny said Monday in an interview with Austrian state broadcaster ORF-TV, Bloomberg News reported Monday. "I see for the future a tri-polar development, and I don't think that there will be fixed exchange rates between these poles."

The dollar has served as the world's reserve currency for more than 30 years. A reserve currency is one which financial institutions -- and nations, for that matter -- seek to own during times of financial crisis, stress, or uncertainty. The reserve currency attracts investors in a phenomenon called a 'flight to safety.'

The euro, the currency of the euro zone, this decade has challenged the dollar's reserve currency status, following its introduction into global financial markets in 1999. (Physical euro banknotes and coins began to circulate on January 1, 2002.) A series of U.S. fiscal policy and trade policy errors, among other factors, has caused the dollar to weaken against the euro from about 82 cents per euro in 2001 to the present $1.3317 per euro.

Twenty five trillion dollars in global market capitalization wiped out. At least $500 billion -- and most likely in excess of $1 trillion added to the United States' national debt. The Fed has loaned money to corporations, added massive liquidity to banks, cut interest, and the U.S. Treasury may invest directly in private banks, if it doesn't nationalize them.

And the currency of the nation primarily responsible for the global financial crisis -- the dollar -- how has it fared?

The dollar has been firm, for the most part, even rising against the euro and British pound. However, the dollar has fallen against Japan's yen. As of Friday at 2:35 p.m. EDT, the dollar had risen 2 cents versus the euro to $1.3382 and 1.5 cents versus the pound to $1.6947, but had fallen one-half yen to 99.33.