Authored by Carmen Elena Dorobăț via The Mises Institute,
As the U.S. trade deficit has been widening for the fourth month running, markets and business experts appear once again bewildered by the events and unsure how to react to them.
On the one hand, they had vehemently opposed the increase in trade tariffs and the trade war that has made headlines this year.
But on the other hand, they now find that U.S. trade deficit reaching its largest level on record – the precise deficit tariffs purported to narrow – is very worrying.
Furthermore, as they scramble to adjust their costs and production plans to the increasing uncertainty of world trade relations – including here not only U.S.’s trade disputes with China, but also UK’s planned exit from the EU and the fraught relationships at the WTO – global companies are also paying less attention to the Fed’s and other central banks’ monetary policies.
It is not hard to see why they are confused. Political turmoil is bound to make navigation of global markets much more difficult, and smooth planning almost impossible. At the same time, the fallacy that trade deficits are detrimental to a nation in and of themselves is very deeply rooted in public opinion. By comparison, government deficits and easy monetary policies — the real culprit behind eroding wealth and falling purchasing power — get a lot less bad press than they deserve.
It is thus worth reminding ourselves that trade deficits themselves are not at all problematic. As Mises (2009, 448) explained:
While an individual’s balance of payments conveys exhaustive information about his social position, a group’s balance discloses much less. It says nothing about the mutual relations between the members of the group. The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments.
If one wants to describe a country’s social and economic condition, one does not need to deal with every single inhabitant’s personal balance of payments. But one must not form other groups than such as are composed of members who are by and large homogeneous in their social standing and their economic activities.
The problem lies with government spending and monetary inflation, precisely those activities that global businesses have been taught either to ignore or, worse, to embrace and lobby for. Privately contracted debts, such as those part of a trade deficit, are privately paid. Publicly contracted debts, however, such as those recorded in government debts and budget deficits, and financed with credit expansion, are paid by the taxpayers. The same Mises (2009, 227-8):
But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappear entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government’s apparatus. The government pays interest on capital which has been consumed and no longer exists.
Here’s also a short excerpt from Murray Rothbard, explaining in less than two minutes and in characteristic style, why trade deficits are innocuous compared to public debt:
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