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Monday, October 06, 2008

Cavuto: We're Bad, But Europe's Worse

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Neil Cavuto, Managing Editor and Anchor

FOXBusiness

Missed tonight's Cavuto? Catch "The Deal" right here on FOXBusiness.com

Here's the deal:

The whole world is clueless.

It's why every major market fell big time today.

It's why our own Dow tumbled below 10,000 for the first time in more than four years today.

We...they...got the message today. Our cold is now the world's pneumonia.

And I'm here to report, it's not just us.

Not just our banks.

And our markets.

Not just our insurance companies.

And finance stocks.

It's theirs too.

In fact, if you can believe it, as bad as we are, the rest of the world is worse.

Here's why:

We've owned up to our problems...they're just beginning to grasp theirs.

We've come up with a solution, as ridiculous as I find it, they don't even know where to look.

Nowhere was and is that more obvious than in Europe.

And the vaunted European Union.

An amalgam of states that would in time, economically destroy the united states.

One minor detail.

There is no central mechanism in those European states to deal with those states' problems.

Which means every state is kinda on its own.

Ireland rescues its own banks.

To which the EU says P-U...But can't do a damn thing.

No wonder the Euro falls and the dollar rises.

Which is kind of the world's crazy way of saying, "we" matter...And "they" don't.

No wonder the French...are fried.

Everyone would agree they see more "Made in Taiwan/China/Japan/etc..."tags than "Made in the USA" tags for the past several years. Well, that "Made in _____" tag on your clothing has an economic term sewn into it: trade deficit. A trade deficit happens when one country buys more goods than it sells to other countries.

For example, if the entire United States (all 300 million of us) made only 100 shirts this year, and if all of China made 100 shirts, some of those shirts would be traded between us- we would sell a few to China, and vice versa. But a trade deficit happens when one country sells more shirts than another. China, in this example, could sell 85 shirts to America. The U.S. could sell 55 shirts to China. So, in this trade, China sold more shirts to the United States, 30 more in fact.

Most businessmen and economists believe that most trade deficits aren't a bad thing; it's just part of trade, and at some point trade between two countries should balance out eventually.

The big exception is the U.S., which buys vastly more stuff than it sells, and has done so for decades.

Why does this matter? Well, in order to buy those shirts, you need money. And if you are buying more shirts than you're selling shirts, you're losing money. If you're a business, you won't be in business much longer.

But, countries aren't businesses. They are, well, countries, and can print all the money they want. People who deal with currencies, or each country's version of money, look at trade deficits as one way to find out how much each country's currency is worth. If you have to print more money, each dollar you print can possibly lower the value of the other dollars out there. Like stocks, you can buy and sell currencies on what's called the foreign-exchange market (or, if you want a buzzword for the office, say Forex market).

Well, because the U.S. has been buying a lot of stuff from China for many, many years, China holds a lot of U.S. dollars. If China were to sell those dollars on the market at some point, well, it wouldn't be very good. The U.S. dollar's value would fall -- making imports and traveling abroad much more expensive.

Trade deficits are usually a good thing, because it shows that the global economy is working. It's just when a trade imbalance gets too high where economists and investors start to become concerned.