Oh Dear God…..

This is Spud levels:

According to the latest national accounts, published last week, Britain’s current account deficit widened in the first quarter of this year to an astonishing 8.3pc of Gross Domestic Product, easily the biggest such deficit ever.

In layman’s terms, what this means is that overall expenditure in the UK is exceeding national income by nearly a tenth of the value of the entire economy.

All other things being equal, there would be nothing left at all in the national coffers in little more than ten years from now if we were to carry on like this.

Nonsense.

Fortunately, the balance of payments doesn’t work quite like that; the deficit is paid for by inflows of capital from overseas,

Quite.

Trade deficits are financed by capital surpluses. So, foreigners are investing more in the UK than we are outside it. Note that quite a few economists would argue that this is the actual cause here – the investment flows cause the trade ones.

GDP is £2 trillion and change a year, 10% of that is £200 billion, the national wealth (household that is) is £15 trillion. Take us quite a long time to sell all of that.

And we do create new wealth all the time as well. What we actually do is sell some portion of the newly created….

15 thoughts on “Oh Dear God…..”

  1. Now if they invested some of this loot in fracking, overseas expenditure would drop and industry and the people would have plenty of cheap energy.

    They could even save money by dumping the subsidies for renewables!!!

  2. Bloke in the Fourth Reich

    It doesn’t change the fact we are, quite literally, selling the country to China in exchange for cheap plastic tat and new smartphones every 2 years. It’s not a sensible way to consume your capital.

  3. “And we do create new wealth all the time as well. What we actually do is sell some portion of the newly created….”

    This is the national version of ‘My house price keeps going up so I can remortgage every few years and spend far more than my earned income’. A great trick, until house prices start to fall (or even just stagnate), then suddenly you have to live within your (considerably smaller) income.

    Why do you economists think that just because some economic process works for a certain period of time that it will continue to work like that forever? Selling foreigners our assets so we can live the high life buying cheap tat from abroad is not a long term recipe for a secure and wealthy future. At some point the process will reverse, and then everyone is deep in the shit.

  4. Just because I know the numbers for the US. Deficit is $500 billion a year, National wealth is $150 trillion. Annual increase in wealth about $8 trillion. Really just don’t see problems with those numbers.

  5. It’s actually more complex than this. A trade deficit must be financed, but there are many ways to do this, e.g. foreign borrowing, selling domestic assets, selling foreign assets, income from foreign investment etc. The UK’s net assets/liabilities has often been more connected to foreign vs domestic investment performance than to the trade balance.

    As a (very, very crude) summary, up to 2008 the UK was financed by foreigners depositing money (technically us borrowing money) and superior investment performance (presumably using that money). Since 2008, the UK trade deficit was financed by reducing foreign assets.

  6. It is indeed nonsense as stated. If the deficit is 8% pa, that is 8% of national income, a flow of value, not 8% of the economy, which is a measure of capital value.

  7. “Just because I know the numbers for the US. Deficit is $500 billion a year, National wealth is $150 trillion. Annual increase in wealth about $8 trillion. Really just don’t see problems with those numbers.”
    Yeah but it don’t actually work out like that, does it? All neatly balancing. What happens is some people gain & some people lose. And it’s always the same people gain & the same people lose. Continuing net transfer from savers to borrowers. From the industrious to the parasites.

  8. Just because I know the numbers for the US. Deficit is $500 billion a year, National wealth is $150 trillion. Annual increase in wealth about $8 trillion. Really just don’t see problems with those numbers.

    Sounds like an argument for more govt spending!

  9. “Just because I know the numbers for the US. Deficit is $500 billion a year, National wealth is $150 trillion. Annual increase in wealth about $8 trillion. Really just don’t see problems with those numbers.”

    So if this process is so wonderful, why does Detroit look like a warzone? If this ‘Sell foreigners our (financial) assets in return for consumption’ model is so wonderful, why are real incomes in the West falling? What happens if the process starts to go into reverse? The foreigners no longer want our assets, what then?

    And indeed if this is such a wonderful economic model, why can’t everyone live beyond their means forever?

    You are in the same cloud cuckoo land as Spud is. He thinks a country can print its way to wealth, you seem to think one can create a sort of infinite positive feedback loop so we all end up millionaires. Each equally insane concepts, and just as dangerous, because when they unravel (which they will) it creates revolutions.

  10. “If this ‘Sell foreigners our (financial) assets in return for consumption’ model is so wonderful, why are real incomes in the West falling?”
    Pre-COVID real incomes were not falling. Current issues are caused by borrowing+printing and banning people from producing stuff. Real incomes have often risen during a current account deficit. The UK certainly has higher incomes than in 1983 (the last annual current account surplus).

    “What happens if the process starts to go into reverse? The foreigners no longer want our assets, what then?”
    It depends. Conventionally the currency falls until trade balances. However, it’s also possible to pay with foreign assets – and sustainable if the assets rise in value faster than they’re sold.
    Why not ask the reverse: what happens to (say) China if everyone decides not to buy their stuff?

    “And indeed if this is such a wonderful economic model, why can’t everyone live beyond their means forever?”
    It’s called balance of payments for a reason. Everybody can’t have a trade deficit just as everyone can’t have net capital inflows.
    And a trade deficit does not mean living beyond your means. Every retiree has an ∞% trade deficit, but most are not living beyond their means.

    Governments have tried controlling currencies and trade balances in the past, it did not go well.

  11. In a way, individual humans can live beyond their means, because at some point they die, so their accumulated assets can then be used to pay off the accumulated debts. Countries can’t do that as they exist forever.

  12. ‘Countries can’t do that as they exist forever.’

    They don’t, and governments in particular certainly don’t.

    Possibly some governments are planning to die even now, politicians shifting into ‘loot the country and escape’ mode and all that.

  13. Grey,
    Politicians doing a “lie, loot and leave” I can understand, but what do the sir Humphreys think will happen to their beloved civil service when the brown people take over? Or to their children and grandchildren?

  14. It’s an interesting question RlJ. My experience is that most people are deeply conservative in the sense that they expect the status quo to continue infinitely. But you can grade that attitude by their social position. Those at the bottom of society are used to unexpected change because they have so little agency over their own lives. Those at the top believe change will never affect them. personally. Although they’re quite content to impose it on others.
    So the answer to your question is they never think about it.

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