Modern Mythology: The ‘Balance of Trade’
7th March 2018
At last I’m going to get some use out of my Economics degree.
We hear a lot in the news about the ‘balance of trade deficit’. Supposedly this is a bad thing. In fact, however, it’s irrelevant. Like ‘social justice’, it falls into error by focusing on an incomplete subsection of a complex system.
The phrase ‘balance of trade’ refers to a comparison between how much stuff we send to other countries and how much stuff they send here.
When we send less stuff to them than they send to us, that’s called a ‘balance of trade deficit’.
The reason it doesn’t mean anything is because other countries don’t just send us stuff out of the goodness of their hearts. The expect to get paid. And they do get paid. This ought to come as no surprise.
So what happens when they send us more stuff than we send them? Do they not get paid? (What do you think?) They do indeed get paid. When they send us more stuff than we send them, they wind up with the difference in dollars. Perhaps an example will make this clear. If I give you stuff worth $100, and you give me stuff worth $150, you’re going to want that $50. And you’re not going to make that trade unless you get it. Depend on it.
Now, in the Good Old Days when countries were on the Gold Standard, that difference would mean that I need to send you $50 in gold. Eventually I run out of gold, and that’s a problem. So in the days of the Gold Standard, a balance of trade deficit was actually a problem, because it ran the danger of a country running out of the stuff that backed their currency. If you have X number of dollars in circulation backed by Y amount of gold, and you send $50 worth of gold overseas, then you’ve got X number of dollars in circulation backed by Y-50 amount of gold. This is called ‘deflation’ and it is pretty much always a bad thing.
But we don’t use gold any more. If we send less to a country than they send us, they wind up with a big pile of dollars. What kind of dollars? Paper dollars. That’s right — they wind up with a big pile of paper that they hope we will be good for, on down the line. (Feel free to utter the magic words ‘Thuckerrrrr’ in a Bugs Bunny voice if you wish.)
So: Do they just sit on that big pile of paper and hope that it will be worth something someday? Uh, no. They spend that money in the U.S. as quickly as they can, in the form of ‘investment’. Feel free to look it up. This is why Saudi Princes and Japanese zaibatsu buy American companies, real estate, and other stuff that stays here rather than going overseas to be included in the Balance of Trade computation. Ignorant people, such as journalists and Keynsians, mistake the part that they see for the whole, and so run around in circles and jump up and down (and get handsomely paid; nice work if you can get it), but it’s all hot air.
So when you hear somebody bloviating and handwringing about the ‘balance of trade deficit’, imagine that person with a sign around his or her neck saying ‘I am stupid’. It will make you feel better.