The trade deficit widened 8.8 percent to $46.3 billion in August from $42.6 billion the prior month as a rise in imports swamped gains in exports, Commerce Department figures showed today in Washington. The number of Americans filing claims for jobless benefits unexpectedly climbed by 13,000 to 462,000 last week, according to the Labor Department.

Economists at Morgan Stanley cut their forecast for third- quarter growth based on the increase in imports from countries like China, while at the same time boosting estimates for business investment. The prospect that unemployment holds above 9 percent through next year and a lack of inflation are among reasons Federal Reserve policy makers may ease monetary policy.

The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world's reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.

Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro. The dollar index, which tracks a basket of currencies, reached its lowest level this year.

A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be "irresponsible" as it made US exports more competitive at the expense of its rivals.

Simon Derrick, chief currency strategist for BNY Mellon, said: "In narrow terms, the US is winning the currency wars as a weaker dollar will help its economy, but it could damage the other big economic blocs of China, Japan and Europe."

Investors are torn between two extremes. Is the US heading for a decade of Japan-style stagnation characterised by years of falling prices - or will the hundreds of billions of dollars likely to be pumped into the economy by the Federal Reserve lead to the opposite: rising inflation?
...
"Investors are quite schizophrenic at the moment. They are worried about deflation in the short term but are concerned further out about inflation," says Keith Wade, chief economist at Schroders, the fund manager. "It means they will have to change horses over the next year or two."

FedsFew investors reckon that prices will fall persistently, especially with the Fed determined to head off that outcome. But, with economic growth still anaemic and core inflation at less than 1 per cent in the US, the immediate threat is clear enough.

"The deflation risks are probably higher than the inflation risks," says Richard Urwin, investment head in fiduciary mandates for BlackRock in London. "While we are in a low-growth environment, these deflation concerns aren't going to disappear easily."

Pelosi does not seem to appreciate, however, that the US cannot profitably produce the goods it imports from China. If tariffs were imposed, similar low-price products would be imported from India or Mexico. No American jobs would be created. Indeed, a trade war would lead to a net loss of American jobs. Any country hit by tariffs invariably reciprocates, and China would act against competitive US industries such as farm products and hi-tech.
[....]
A much more attractive future, he argues, "requires a national industrial-restructuring programme in which the government would invest in 21st-century technologies with the goal of establishing an unassailable American lead".

If the economics of this proposition are so simple, why doesn't it happen? As George Soros explains, it is because of American anti-statist ideology: "The imbalance between consumption and investment must be corrected ... The obvious solution is to distinguish between investments and current consumption, and increase the former while reducing the latter. But that seems politically untenable ... a quarter-century of calling the government bad has resulted in bad government."

The fact that some US politicians' economic arguments are confused is because they have created a situation whereby America has ample finance but no mechanism to turn it into investment - consequently it remains in economic stagnation. Instead of creating a scapegoat in China and proclaiming "currency wars", the way out is to address the US's real economic problems.