Well, yes and no really

I think it is just as well for the City and the world of high finance that I lost all interest in matters fiscal after completing an A-level in economics.

Supply and demand, the multiplier effect, macro and micro economics, bull and bear markets. Basically understood. Fast forward from long ago last century to the present day… bond yields, derivatives, interim permissions, net FDI balances. Nope, not a clue.

Thus one goes to the wise men of economic interpretation, in hope of light being shed, and what do you find? A man I regularly turn to for elucidation last week had a fit of the nonsenses. Digesting Donald Trump’s trade threats, he came up with: “Deficits and surpluses must necessarily sum to zero.” A few paragraphs later, he was back on familiar ground: “In other words, the two effects will net to zero.” I’m not saying that this is complete tosh, but it certainly smells rather off.

Off? It’s a statement of the bleedin’ obvious. As Bootle says:

This isn’t exactly the justification that president Trump gives for his actions, nor indeed does it reflect what he seems to understand about international trade.

He seems to believe that the trade balance is like a company’s profit statement. Exports are good and imports are bad. Accordingly, if your exports exceed your imports then you are “winning” and if your imports exceed your exports then you are “losing”. Moreover, he seems to believe that this is true even on a bilateral basis. This is the economics of the madhouse. Since deficits and surpluses must necessarily sum to zero, the implication of Trump’s economic philosophy is that international trade brings no net benefit for the world as a whole.

Quite clearly true, no?

20 comments on “Well, yes and no really

  1. If running trade deficits are so good, and surpluses so bad, why is Germany such an economic powerhouse, and Greece a basket case?

    The whole point of running a trade deficit is you’re living on tick, as a nation. Your’re consuming more than you produce, and paying for it with debts, or selling off assets. Thats the only way it can happen – the capital and current accounts have to net off.

    Thats no way for a nation to live in the long run, eventually it catches up with you, and you pay for it, with massively reduced standard of living. Look at Greece – it caught up with them in spades, after years of living the high life on borrowed money, buying German cars.

    World trade doesn’t ‘make everyone richer’ if the deficits and surpluses are so structurally fixed that certain countries just consume and others produce. Eventually such a system collapses, and everyone suffers.

  2. President Trump doesn’t view Americans as simply economic units. He sees the millions of Americans without employment due to offshoring, bad trade deals and mass third world immigration and thinks it’s a bad thing.

    It is.

  3. Jonathan – true. The unemployed don’t consume enough of the right things, don’t spend enough money and don’t use expensive services.
    Which is why businesses prefer employed people.

  4. Yes, the result of Trump’s mad, juvenile economic illiteracy is that the USA will become economically vibrant and more wealthy. Like all the other experts, economists will scratch their heads and wonder how this blundering toddler can be so lucky all the time.

  5. Martin.

    I was trying to get the point over that unemployed people can suffer a huge loss of morale – especially if they’ve been unable to get a job for many years. This is a bad thing in and of itself.

    I’d also imagine it’s infuriating for many low/ unskilled American workers that millions of illegal immigrants are employed in low-skill work if that’s pretty much all you’re suited for.

  6. How much longer will people buy the Observer? That article is not even the most pathetic one!

  7. Agree with the Fe man, who agrees with Tim.
    So UK has a trade deficit with china and quite a big one. The UK sells the Chinese apartments at Vauxhall, and education at schools and places like Sussex University.
    So what to do if the deficit on trade in goods persists. Build another Vauxhall Tower or 3, and stop subsidising the military to attend private schools releasing those school places to sell to foreigners. And stop including students in immigration caps. And stop everything where there’s a smelly government intervention.

  8. “He sees the millions of Americans without employment due to offshoring, bad trade deals and mass third world immigration and thinks it’s a bad thing.”

    They’re without employment because they don’t have the skills to do the types of work America needs doing, and what little they can do other people can do better. Nobody would put up with all the extra difficulties and risks to employ foreigners or immigrants if locals could do it cheaper.

    That’s not necessarily their fault, of course. There can be all sorts of barriers put in the way of them moving up the job ladder, (like a poor quality state education, for example). But to respond by raising barriers to keep out competition is the economic equivalent of employing one set of them to dig holes and another set of them to fill the holes in. It gives them ‘jobs’, but reduces productivity – the whole purpose of economic activity! – and makes society as a whole (including them) poorer.

    It’s the same logic as union closed shops. The employer doesn’t pay the wages we like because they can find other workers from outside the union who will do it cheaper. So we make a rule that only union members can work here. That raises wages right enough, but reduces production and thus raises prices in the shops. What you gain from your own industry doing it, you more than lose from every other industry doing the same. The result is spiralling prices as wages chase prices with ever-fewer goods and services being produced to go around. In short, this is re-warmed 1970s UK socialism.

    The only workable solution is to give people the ability to do the higher-paid jobs. Anything else results ultimately in socialist economic hellholes.

  9. “So UK has a trade deficit with china and quite a big one. The UK sells the Chinese apartments at Vauxhall, and education at schools and places like Sussex University.”

    Education comes under services so would be included in the deficit already. The apartments are the only thing that we are selling to the Chinese that offsets the deficit in goods and services.

    “So what to do if the deficit on trade in goods persists. Build another Vauxhall Tower or 3, and stop subsidising the military to attend private schools releasing those school places to sell to foreigners. And stop including students in immigration caps.”

    And what if they don’t want to buy any more flats to leave empty in ghost developments? What if they sell them for whatever they can get and take their money home? What if the rich Chinese decide that being educated in a declining nation isn’t a very good thing for their kids? Where does that leave the UK? Unable to afford the ‘cheap imports’ thats where.

    All this ‘you can run a massive trade deficit without any problem indefinitely’ idea is bollocks. Its one of those things that will go on quite happily until it doesn’t, and then you’re in the shit. You are basically slowly transferring the power over your economy to someone else, who can pull the plug at any time they choose, and you become impoverished overnight.

    Personally I don’t think thats a very good position for a nation to get itself into.

  10. ” The only workable solution is to give people the ability to do the higher-paid jobs. ”

    Learn to code!

    This only works if you’re a blank-slater. i.e it’s crap.

  11. If the capital isn’t coming in to finance the trade deficit then the trade deficit stops. But then what you’re arguing is that the trade deficit should stop. So, there’s your solution then.

    Then, of course, the currency falls until the more capital coming in chasing bargains finances the lower trade deficit again.

    A lot of thinking about trade and deficits is a hangover from when we had fixed exchange rates. An awful lot of people did learn their economics back then, or from textbooks written by those who did. Floating exchange rates entirely change the situation though.

  12. “If the capital isn’t coming in to finance the trade deficit then the trade deficit stops. But then what you’re arguing is that the trade deficit should stop. So, there’s your solution then.

    Then, of course, the currency falls until the more capital coming in chasing bargains finances the lower trade deficit again.”

    And what happens at the point of the currency dropping? Everyone becomes poorer of course! So how’s that ‘making everyone richer through running a massive trade deficit’ then?

    If I start issuing chitties saying ‘I owe you 1 hours labour’ and buying goods with them (lets assume I have a good reputation as a hard worker) then I can indeed live the high life, and consume far more than I produce. For as long as people accept my chitties, or I have assets I can sell them in return for my chitties back. Eventually I’m going to run out of assets that people might want, and creditworthiness – people are going to start returning the chitties demanding their labour, and I’m not going to be able to make good on all of them, and the whole thing collapses, and I’m a lot worse off.

    You can’t run a massive trade deficit for ever. Eventually it comes back to bite you in the arse.

  13. Depends. I know the figures for the US. They must sell assets of about $500 billion a year to finance the trade deficit. They create assets at some $8 trillion a year. They can do that forever and the foreigners will own an ever decreasing portion of the US’s assets.

    What’s arse biting about that?

  14. Tim,

    Is there a link at all for that $8 trillion a year of “new assets created”? Simply that it looks very high?

  15. OK, I understand. Net worth, including current “value” of housing stock.

    That make sense, I had misunderstood. Thanks.

  16. “Net worth, including current “value” of housing stock.”

    Ah, the perpetual money making scheme – we all just going on selling each other houses at increasingly high prices. What could go wrong?

  17. “They can do that forever and the foreigners will own an ever decreasing portion of the US’s assets.”

    This is a detail, but that’s not quite as it reads. The $0.5 trillion is annual inward investment, and the $8 trillion includes revaluation of what is now up to a circa $100 trillion asset value base.

    Because each year there is fresh investment, that fresh nvestment is also being revalued along with that owned by the locals.

    If all of the annual increase is revaluation (it won’t be, as there will also be new build), it will in fact be a year on year increase in the % share externally owned (at 0.5% per annum currently, based on the link ie $0.5 trillion per $100 trillion asset base).

    Without knowing how much of the $8 trillion is revaluation and how much is newly built (or some other way of knowing what the external ownership % share is), we can’t confidently say if that external % share is diminishing or not.

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