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Why don’t trade deficits matter?

In contrast to my early years as a financial journalist, when sterling crises were two a penny, nobody much cares about the current account deficit these days. Yet news last week that it reached a jaw-dropping 7pc in the final quarter of last year was enough to make even the most sanguine of observers sit up and take notice.

It’s a profoundly alarming spectacle, but both the UK budget and the current account deficits seem get markedly worse with each passing, post war, economic cycle. These latest ones are by far the deepest yet.

That they are in any way tolerable is I suppose down to the much more sophisticated nature of global capital markets, which makes funding them a lot easier than it was.

No, it’s because we don’t have either fixed currency rates nor dirty floats. You can manage two of three, just about: currency rates, interest rates and trade balances. You cannot manage three of three. For the third is the tool that must be used to manage the other two.

But if you’re not trying to manage currency rates then you can leave the trade balance alone.

9 thoughts on “Why don’t trade deficits matter?”

  1. Debt is what matters not deficits.

    No line of credit no deficit.

    The deficit is solvable. The mass of debt and the state’s promised-forth unfunded liabilities are not. Unless you count economic chaos and disaster as “solutions” rather than unavoidable events.

  2. @Ecks, they’re talking trade deficit, not government deficit.

    And it’s true, you can buy imports at a greater rate than you export indefinitely. Until you run out of things of value in your place to exchange for the disposable tat you are buying. It’s a curious argument that running a sustained deficit for a long time is a good idea. If you want to trade you have to have stuff to trade, and ownership of everything of value in the country is a foolish thing to trade.

    And now we have the most paranoid Chinese leadership in decades it’s anyone’s guess what will happen. I suspect they want to force the west into a trade war so they can blame us for their coming economic difficulties.

  3. I may be wrong, but I think the UK’s trade deficit is largely funded by the surplus on the capital account. If all that foreign direct investment dries up, then we’ll be in trouble. So aren’t there four, not three, factors here? And how many of of the four can be managed simultaneously?

  4. Isn’t this how Hong Kong was founded? The pesky Chinese were willing to sell us loads of stuff but refused to buy anything from us, so we had to send the gunboats in to correct the market imbalance.

  5. jgh
    Sort of. The Chinese had lots of stuff the west wanted to buy (porcelain, silk, tea), but the west didn’t have much the Chinese were particularly interested in. Solution: get them (or a good portion of their population) hooked on something the west could supply.

  6. So what can we sell to China today?

    During the debate about MFTN status the argument was that we would have access to the huge number of Chinese in the market. If we don’t make things they will buy why should we buy anything from them?

  7. BiND,

    That is one product. Now to find thousands more to make up the imbalance.

    Thanks for sharing the link. I wasn’t aware of the value of chicken feet. I do know that the dark meat is exported.

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