Re: Reap what you sow
“Balance of Payments” is a very naive measure. People assume that it reflects “country produces and exports more than we consume from abroad, so we are accumulating wealth”. It’s called the “Householder Fallacy”. That’s sometimes true, but often it can also reflect many other fundamentals.
Example 1: importing goods exactly equals exporting currency. That’s the way a money transaction works. And that’s exactly what USA does. It runs a huge “trade deficit” largely because the world has an almost inexhaustible demand for dollars, which is the worlds reserve currency. The USA has no problems at all with its huge “trade deficit”, because it can and does just print dollars, has done it for a century, will continue. The *necessary definition* of a sovereign nation includes printing its own
Example 2: in a financialised country like U.K., we list a lot of (most of) global companies on our stock market. Their share price is denominated in sterling. So when the share price rises, where do you think the money comes from? The “total quantity of money” is *not fixed*. It is leveraged on the value of underlying assets. So, when the value of an *Australian* mining company quoted on the FTSE goes up, more sterling magically appears in the U.K. The owner can of course sell the shares, but then still in sterling to someone else in the U.K. The net effect of that is zero in terms of Trade Balance. Therefore, *global* stock market rises produce a positive offset to our negative trade balance. In fact, U.K. trade balance *must* be negative in the equation to counterbalance global nominal stock market gains
And here’s where it gets both weird and current: global inflation means that *all* assets cost more, in units of currency. Stock markets rise in nominal terms even when they are falling sharply in real terms. At those times, by mathematical balance, any country economy that holds large amounts of global assets on its books in its stock market, *must* have a large negative Trade Balance. Hence….now. And for exactly the same reason, the 1970s.
For the U.K., Trade Balance tells you almost nothing about real trade balance of goods, or even services, but everything about the global stock market and global inflation.
Example 3: The canonical example given in economics textbooks. Imperial Rome in its glory years. The City of Rome imported and consumed the wealth of the entire known world. It produced and exported nothing. Not even soldiers: most Roman soldiers were not born in Rome. It’s Trade Balance was perhaps the most negative in history, relative to world GDP. Yet it dominated the world for five centuries, economically as well as militarily.
Biting the hand that feeds IT
