So Ritchie doesn’t understand the balance of payments either

I know he has to improve the UK’s balance of trade and net overseas foreign direct investment if he is to clear the deficit but does he have to do that by quiet so blatantly begging China to invest here?

Sigh. The balance of payments means that payments must balance. So, a trade deficit means a capital account surplus. A capital account deficit means a trade surplus. Thus you cannot be trying to improve the balance of trade (ie, make it less negative or more positive in the usual construction) by asking foreigners to invest here.

Sigh.

52 thoughts on “So Ritchie doesn’t understand the balance of payments either”

  1. His future students of public finance are going to have a tough time. He clearly doesn’t have the rudiments correct and he is teaching first and second degree courses.

  2. Bloke in North Dorset

    I’ve raised this before. They don’t want us earning money through our successful service industries eg finance so wtf do they propose we manufacture that the rest of the world will find attractive and cheap enough to buy?

    Arm waiving is all very well up to the point where you have drawn attention to what you consider a problem, now we need to see the plan.

  3. diogenes: I think the distinction is between trade deficit and budget deficit. There’s no guarantee that that’s a distinction which Murphy is (capable of) making.

    arnie: I’m afraid that doesn’t work either.

  4. Slightly OT, prompted by reading an article by AEP in the DT and a conversation with a friend who runs a large group of companies in the construction industry.

    AEP says labour is drying up and my friend is tearing his hair out trying to recruit skilled labour having secured a large contract in London.

    So, given the largess of Government contracts, presumably Ritchie has contingency plans for dealing with the insolvencies People’s Green Free Money Quantative Easing will bring…

  5. wtf do they propose we manufacture that the rest of the world will find attractive and cheap enough to buy?

    Who cares? For them, the purpose of production is not consumption but privileged employment and the ability to wield political power without having to run for election.

  6. the insolvencies People’s Green Free Money Quantative Easing will bring…

    Of private companies? They’re just neoliberal trolls.

  7. I just bought a car.

    Gads, now I have a trade deficit!

    Whatever can I do?? Ask my neighbors to start buying my stuff ?

    Like, maybe, my new car?

    Yeah, that’ll help.

  8. Dennis the Peasant: Today Ritchie solves the trade deficit by suggesting a ban on the importation of foreign root vegetables. That should fix everything.

    Excellent.

    Given that Murphy, I think, is an Irish potato, this is truly excellent.

    Let the great Norfolk pogrom of alien and retired tubers begin.

  9. Remember, in conventional economics, the purpose of all production is consumption.

    In Lefty economics, the purpose of production is employment. Or, in its extreme old-fashioned case, the purpose of production is production.

  10. If people do not understand the link between the current account deficit, and the deficit, that is ok. They are in good company, the ECB does not understand it either, nor does the former chief economist of the IMF.

    (This is all in the context of Greece, but if people are interested, there is a link. And with a UK balance of payment situation quickly approaching Greek proportions, it might be a good idea to read up on it.)

    Here some economics about Greece, and a suggestion for a better Troika programme to M. Blanchard.

    https://radicaleconomicthought.wordpress.com/2015/07/01/the-terrible-twins/

    https://radicaleconomicthought.wordpress.com/2015/07/11/blanchards-tales-of-woe/

  11. @ Matt Usselmann
    I do understand the link between the government deficit and the current account deficit (which resembles a chain rather than a rod, so Murphy is wrong as usual) but *you* seem not to understand the linkage between printing money and inflation. Maybe you weren’t alive in 1974-9 but non-one who can remember them could make the ludicrous suggestion that “The main determining factor for inflation is private credit growth rate,”. The only period of hyper-inflation in British history was wholly public-sector-led, with the massive pay rises to the coalminers producing a rise in energy costs which provoked pay demands from other public sector unions while private sector pay and prices were controlled then a further pay rise for the miners and another spin of the merry-go-round.

  12. diogenes

    There is a direct link between the trade deficit and the fiscal deficit. It is actually not possible to have a trade deficit and a fiscal surplus unless either the domestic private sector dis-saves (which the OBR reckons would most likely mean households increasing their already considerable indebtedness) or GDP falls. So if Osborne wants to eliminate the fiscal deficit without inducing yet another recession and/or financial crisis, he does have to do something about the trade deficit. As Tim quite rightly observes, encouraging capital export to the UK does not achieve this in the short-run. However, FDI can improve export capacity in the longer-run.

  13. @ Frances Coppola
    Until the 21st century the domestic private sector spent most of its time generating more wealth than it consumed. It is only as a result of the £1trillion-plus increase in consumer debt in the Brown era that the household sector is in such a financial mess that you consider it is “actually not possible to have a trade deficit and a fiscal surplus …” Half a century ago it was quite possible to have a trade deficit and a fiscal surplus or a current account surplus and a budget deficit (I think that you should talk about a current account deficit rather than a trade deficit in this context), but your progression thereto is in a series of illogical steps. You overlook the possibility of the corporate sector borrowing money to invest at a time of negative real interest rates.
    I quite agree with your conclusion “So if Osborne wants to eliminate the fiscal deficit without inducing yet another recession and/or financial crisis, he does have to do something about the trade deficit.” but

  14. @john77
    “Maybe you weren’t alive in 1974-9 but non-one who can remember them could make the ludicrous suggestion that “The main determining factor for inflation is private credit growth rate,”. ”

    Ok, fair enough, mid seventies had strong unions, full employment and multiplying of oil-prices, which led to inflation.

    So I will change my sentence, to the the “main determining factor IN RECENT HISTORY for inflation is private sector credit growth”.

  15. @ Matt Usselmann
    And have you re-written all of the rest of the nonsense on your blogpost?
    And the oil price rise would not have generated systematic inflation in the UK since it was less than half of fuel consumed and the large part was for petrol, most of which resulted in a cut in consumption by or a lowering in the standard of living for private motorists. Your disingenuouness is a bit too obvious.

  16. Frances, given that the government balance is about 25% of the current account balance, I can accept some kind of linkage but it is or tends to be swamped by the trade balance.

    Have tried to look at figures but it seems that historically the balance of payments only balances because of a relatively massive figure for “errors and omissions”; the capital balance for example is dwarfed by that number. So I am not sure what conclusions can be derived from the data. Even the ONS states that subsequent revisions to published numbers are statistically significant.

  17. @Frances Coppola
    “However, FDI can improve export capacity in the longer-run.”

    It can, if the will increase UK export with the investment being undertaken. That particular bit of investment, though, is £25bn for the Hinkley C power station. No electricity is exported, it is for domestic consumption.

    The French/Chinese bring in £25bn of foreign direct investment, but want, over the next 35 years £75bn back! Paid for by our electricity charges. Which is roughly what they would get back if there was no inflation. If there is inflation, they even more back!

    It is completely bonkers, so surely it is time to argue against nonsense like that. Simon Jenkins called it in the Guardian the biggest white elephant ever. Are the opponents of Hinkley C all mad?

    Or should we maybe start question the chancellor’s competence, who is about to sign an agreement for this lunacy with the French/Chinese?

  18. @ Matt Usselmann
    It’s not history if I’ve lived through it.
    And you’re still wrong – household sector credit growth in the Brown era was horrendous. The main determining factors of inflation are unions and printing money, followed by changes in the prices of imports.

  19. @ Matt Usselmann
    The opponents of Hinckley C are not mad, but Tony Blair was when he committed the UK to a ridiculous target for carbon emissions. You can either get into the habit of walking to work or pay through the nose for nuclear power stations. Wind power can be as little as 1% of capacity in January when demand is high and solar power is near its low point.
    It would take me four hours to walk to work (plus four hours back) on the days I have to commute. I could, at a pinch, do it (I have no enthusiasm for the prospect) but could you?

  20. @ Matt Usselmann
    Do you know how much of the petrol price is crude oil, how much is refining and marketing and how much is UK tax?
    Crude oil cost 13.8p per gallon in 1974, 16.7p per gallon in 1978; inflation during those four years was 81.7% according the Bank of England.
    You are talking through your hat!
    Incidentally if you want to produce a misleading statistic, it is good form to get it right. The BP Statistical Review of World Energy states that the rise in the oil price between 1970 and 1980 was 1946% – most of that occurring during a period of inflation not hyper-inflation in the UK.

  21. Dear oh dear. You all need to take a crash course in national accounting.

    John77, what I said has nothing to do with the stocks of debt in the household sector. It is an accounting identify which held in the 20th century just as much as it does now. The problem is that now, households are already highly indebted so are both less willing and less able to take on debt. That does not change the identity, merely constrains some ways in which it can be satisfied.

    I have not ignored the possibility that the corporate sector might borrow to invest. Nor has OBR, which concluded that households would have to take on more debt EVEN IF the corporate sector borrowed to invest.

    Diogenes, yes there is a problem with statistical accuracy but that does not invalidate the identity. The capital and current accounts are mirror images of each other.

    Matt, do please think through the consequences of FDI decisions. Hinckley may produce electricity for domestic consumption, but exporters are domestic businesses. If they are able to produce more goods more cheaply because of Hinckley, then Hinckley improves the UK’s export position.

  22. @John77
    “You can either get into the habit of walking to work or pay through the nose for nuclear power stations. Wind power ….”

    The Dutch cycle, the Germans have wind turbines everywhere, the French produce their own nuclear power at half the price for what they want to sell it for to the UK.

    But the British walk or pay through the nose for nuclear power stations?

    I think you need to be Osborne to sell that as a win-win situation to the British.

  23. @ Frances Coppola
    *I* need to take a crash course? I beg to differ!
    The trade deficit is only one component of the balance of payments. Private sector surplus/deficit comprises household sector and corporate sector.
    *You* have said we cannot have T0 unless H<0 which is (i) ignoring I and C and (ii) consequently wrong.
    "unless either the domestic private sector dis-saves (which the OBR reckons would most likely mean households increasing their already considerable indebtedness)"
    "what I said has nothing to do with the stocks of debt in the household sector."
    Doesn't it?

  24. @Frances
    “If they are able to produce more goods more cheaply because of Hinckley, then Hinckley improves the UK’s export position.”

    IF, but the whole point is that Hinkley C will make electricity MORE EXPENSIVE. It starts off with TWICE the cost of market price electricity! When alternative energy solutions (which British competitors will be using) are falling.

    British companies are already signing contracts directly with the French directly for energy at less than half that price. So who will be stuck with the big bills, the people who voted Osborne into power, obviously!

    When nuclear was first touted as the solution to our energy problems, about 50 years ago, the idea was that the energy was virtually free.

    Then it made sense, possibly, to invest in it. Now, it turns out it is TWICE as expensive as current market prices. There is no technology transfer, there is nothing in it for the UK, other than for Osborne’s banker friends to scalp a couple of percent of the 25bn loans. £500 million for them for doing nothing!

    It is a joke!

  25. @ Matt Usselmann
    The Dutch understand windmills and they use them for intermittent work such as pumping water out of the polders, not to power their grid. The GHermans have gone back to burning lignite as a consequence of shutting their nuclear stations. Wind power is unreliable. The Danes shout about their windmills but when a link to Swedish nuclear power stations failed they had a brown-out.
    The National Grid publishes data on windpower to the grid – go and read it sometime!
    Neither I nor Osborne regard this as a win-win situation – in the past decade we have spent £billions on wind-power and got zilch. In 2014 the minimum level of capacity utilisation of windpower (averaged over half-hour periods) *improved* to 2.1% from 1.8% in 2013. So now you only need to build 49 windmills (instead of 55) if you want to rely on the power output of one.

  26. IF, but the whole point is that Hinkley C will make electricity MORE EXPENSIVE. It starts off with TWICE the cost of market price electricity! When alternative energy solutions (which British competitors will be using) are falling.

    British companies are already signing contracts directly with the French directly for energy at less than half that price. So who will be stuck with the big bills, the people who voted Osborne into power, obviously!

    When nuclear was first touted as the solution to our energy problems, about 50 years ago, the idea was that the energy was virtually free.

    Then it made sense, possibly, to invest in it. Now, it turns out it is TWICE as expensive as current market prices.

    The strike price is a hedge against future prices (from 2023?), not today’s prices.

  27. The Germans manage 40% of grid electricity through renewable energy:

    http://climate-energy.blogs.panda.org/2015/04/02/stories-from-the-grid-how-renewable-energy-changes-the-electricity-business/

    You could also use an economic solution for demand management, A smart grid which makes electricity more expensive when demand is high.

    You could just generally increase the price WITHOUT building a massive white elephant in Somerset. That would cut consumption, and actually make additional capacity redundant.

    You could invest £25bn in smart storage solutions for renewable electricity.

    You could buy everyone a bike, so that they do not have to walk four hours to work, but cycle in a third of the time.

    There is loads of other things which could be done other than Hinkley C. All of them better.

  28. it makes it harder when the uk accounts shift from what I was taught – current account and capital account – to the current IMF standard, which splits the capital account into a financial account and a capital account.

    However, the balancing figure is still so high and inexplicable that no one, other than an economist, would place any trust in the numbers.

    This is the next VW scandal.

  29. ukliberty
    “The strike price is a hedge against future prices (from 2023?), not today’s prices.”

    Would you enter into a contract which doubles your current energy costs from 2023 onwards? And increases it with inflation every year, for the next 35 years?

  30. @diogenes
    Speaking of the VW scandal have you seen that according to Murphy this is prime evidence of the total failure of the accounting reporting system to adequately report companies results.
    For an ex accountant he has a very poor view of the accounting profession and accounting standards. As they amount to works of fiction I wonder what standards he used to prepare his clients accounts.

  31. @ Matt Usselmann
    “You could buy everyone a bike, so that they do not have to walk four hours to work, but cycle in a third of the time.” You really are ridiculous – there would not be room on the roads for that many bikes.
    Making electricity more expensive when demand is high? Already been tried (ever heard of “Economy 7”?) – but that won’t solve supply dropping to 2.1% of capacity.
    We could spend £25bn on smart storage but that wouldn’t solve the problem. We don’t have 64 sites the size of Glyn Rhomney to build pumped storage.
    There are loads of other things we could do, The only economical solution would be to tear up Tony Blair’s CO2 reduction targets until we’ve improved solar power and electricity storage and apply some tough curbs on energy waste – e.g turn down the thermostat and tell women to wear more clothes at work (cue screams of rage). I should like to see more small hydroelectric schemes BUT relying on wind power is just plain stupid.
    The Germans have gone back to burning brown coal since they opted for renewables. One company – *not* Germany as whole – is 40% so-called renewables. Germany claims to average 30% renewables but 30% of that is biomass so its 21% low-carbon energy. You have just doubled the true answer https://en.wikipedia.org/wiki/Renewable_energy_in_Germany
    Since Germany is further south and not at the edge of the Atlanmtic Ocean it gets more sunshine, so the amount from solar is both higher and more reliable so even 21% is higher than we should get – on average – if the UK had adopted Germany’s horrendously expensive policies.

  32. BNiC since Murph’s clients could all sleep soundly in their beds because of his work, I wonder what drugs he used on them…

  33. > When nuclear was first touted as the solution to our energy problems, about 50 years ago, the idea was that the energy was virtually free. Then it made sense, possibly, to invest in it.

    If you think things that generate zero marginal revenue are good investments, I’ve got some financial propositions I’d like to put to you.

    > “You could buy everyone a bike, so that they do not have to walk four hours to work, but cycle in a third of the time.” You really are ridiculous – there would not be room on the roads for that many bikes.

    Not a line I’d try. If there’s not enough space for all the bikes once we take out the cars, how do we ever manage to accommodate all the cars at the moment?

  34. @ Philip Walker
    A bike takes up three to four times as much space as a walker and requires a bigger space margin in front and behind for stopping distance. On the road two bikes side by side take up a little more space than a small car with four passengers (counting the driver as one) but they take up that space for five times as long. So you need ten times as much road space for bikes as for full small cars – two-and-a-half times if the car has a driver and no other passenger.
    However the major reason is that a trainload of commuters takes up much much less space than that number of commuters cycling.
    You can get an awful lot of walkers on a piece of road – ever watched the start of the London marathon?

  35. Would you enter into a contract which doubles your current energy costs from 2023 onwards? And increases it with inflation every year, for the next 35 years?

    If the future market price is more than double today’s price I would be happy to have to pay only double today’s price.

  36. True that full, small cars are more space efficient than bikes, but not very many cars of any size are full! Did you use a stopping distance for both the bike and the car?

    There’s an old Dutch study (2004) that ran some simulations and estimated a capacity throughput of about 2000 cars per hour per metre of road (lane width 3.5 m), and capacity throughput equivalent to 4700 cars for bikes (lane width 1.8 m).

    http://www.indevelopment.nl/PDFfiles/CapacityOfRroads.pdf

  37. @ Philip Walker
    Interesting (although as it is a Dutch study, it assumes flat roads and disciplined cyclists, so I should discount its bicycle throughput figures by 40-50% when applied to commuting into London, Edinburgh, Leeds, Sheffield, … as most cyclists slow down dramatically when going uphill*, much more so than pedestrians).
    However the main reason why there would not be enough space is that most commuters into London use the train and if we relied on wind power the trains would just stop when there wasn’t enough wind (or too much wind – windmills shut down in high winds), so *all the train passengers* would need bikes. The City of London would need multi-storey cycle parks because there isn’t enough room on the streets for half a million bicycles (or even 400k if you ignore people travelling through it e.g. from Essex to the West End). There are only ten or eleven separate routes into the City so that is a maximum of 52,000 per hour – it would take 8 hours for all the workers to get into the City and eight hours to leave again. Eureka! Mr Usselmann cries – they can work shift so some start at 6a.m., some at 7, …some at 2p.m. and they leave at 2p.m., 3p.m., …10p.m., but if the guy starting at 6a.m. is working a 10 or 11 hour day he loses his exit slot, if he wants to meet someone from the 2p.m. starters, if he lives in Colchester he has to leave home at midnight to get to work on time …
    *Some years ago an acquaintance ran from London to Brighton: I was subsequently informed that the race leader, aged around 50, overtook the cyclist who was supposed to be leading and guiding the runners up the last, fairly horrible, hill before Brighton – and this must have been a serious cyclist, not a fat middle-aged banker/pregnant secretary.

  38. john77: I’m not advocating cycling in place of the train! [1] I hope it was clear I’m not endorsing Matt Usselman’s position, either in its entirety or in its details; I was merely asserting that it’s not accurate to suggest that bikes take up inordinate amounts of space compared with cars, even cars that are full. That was the comparison you were suggesting, and it doesn’t work — or at least, it is not unambiguously clear that the car wins. If you want to change the basis of the comparison to being between bikes and trains, then I am perfectly happy to agree that the train is likely to come out far more favourably.

    [1] For a start, they are normally used for different kinds of journey. I’m pretty unlikely to start cycling my weekly commute, which is a 1.5 hr rail journey between two major Northern cities.

  39. @ Philip Walker
    I only compared pairs of bikes with a car to show that they don’t save a lot of space. Only if cars are full do they take up much less space than bikes.
    Obviously I wasn’t making myself clear. I said that if you abolish fossil fuels, then we shall have to walk to work; Mr Usselmann claimed that we could cycle – I had naturally considered that and dismissed the possibility because there was not enough road capacity. You can get thousands of people on a short stretch of road but only a few score moving bikes. Cycling along railway tracks wouldn’t do much to relieve congestion.
    I didn’t think you were endorsing Matt Usselman – you are too honest/intelligent/both. I was just explaining what I thought necessary at each point because a detailed explanation covering every query would have taken all night to type, so when you pointed out a bit I hadn’t mentioned I tried to explain. You can get 20,000-odd pedestrians on less than a mile of single-carriageway road, but only a couple of thousand bicycles.

  40. London to Brighton: I was subsequently informed that the race leader, aged around 50, overtook the cyclist who was supposed to be leading and guiding the runners up the last, fairly horrible, hill before Brighton

    Ditchling Beacon! Having “been there” several times, It’s not the approach itself – a direct and unambiguous ascent on to the South Downs – it’s more the effort one has expended prior to arriving,

    But having arrived there on foot, and then blasted up the hill (and after 50 miles by that point), yikes?

    John, you are truly a fount of knowledge.

  41. Actually, he’s right (sorry Tim).

    He wrote “balance of trade” not “balance of payments”. Trade can be out of balance, payments cannot.

    But, slipping those little changes in there is something that makes me distrust writers, and think about the agenda behind what they’re saying.

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