The Boy and the Deficit

A lot of people seem to be worried about the trade deficit. Scarcely a day passes without a warning on TV, the Internet, or in the press about the looming imbalance of trade. Contribute it, if you must, to my antiquity and inherent crotchetiness, but when I hear nearly universal opinions from the media regarding the dangers of this or that, I can’t help thinking of the boy and the Emperor’s new clothes. As for the trade deficit, I find myself — as usual — in the position of the boy.

To my eye, untrained in the ways of economics, the trade imbalance, or deficit, consists of the fact that we are buying more from foreigners than they are buying from us. We are sending more money abroad to buy their goods than they are sending here, to buy ours. My first impression is: hooray!

The "money" that we are spending for foreign autos, clothes, appliances, oil, and food is, in fact, imaginary. It has no substance. It is "credit," from the Latin word "to believe." We get "credulous" and "incredible" from the same root. There is no more tangible reality to it than there was to the Emperor’s new clothes. The foreign goods being imported into this country is something obtained, literally, for nothing: money not being a thing.

So what’s the problem? To this, admittedly, untrained eye, the problem seems to boil down to exchange rates. Our money is imaginary, but so is the money of the Japanese and Europeans. This means that exchange rates cannot be determined by physical means, such as weight or purity, but more arbitrarily. I might have mentioned before exchanging dollars for leks in Albania some years ago. Now tell me: how can one possibly know what the dollar is worth with respect to the lek? That currency is of such unimportance that bankers probably ignore it. For all I know, the exchange rates posted in the hotel lobby might have been made up that morning by the bellhop. Since I was there only for a few hours, I didn’t care, and still don’t. (Does anybody?) But it’s a far different story when it comes to exchanging dollars for yen or euros.

If the exchange rate is adjusted to favor dollars, i.e., making the dollar "stronger," foreign goods will become relatively cheaper, and more foreign products will flow into the country, with more unemployment in American industry. This policy will obviously favor some, but harm others. How the matter is decided will depend upon the political clout of the parties involved.

On the other hand, if the dollar is "weakened," foreign imports will suffer, and American industry will benefit, with the result that Americans may be forced to buy higher-priced goods than before. Again, some will benefit, and some lose.

And the problem is not domestic. The fact that we buy more from the Japanese and the Arabs than we sell to them causes them problems, too. They are sitting on mountains of "dollars." What are they to do with them? Watch them lose value daily via inflation? Buy stuff with them? But what? Do foreign central banks want to buy Buicks, or Whirlpool washers by the hundreds of thousands? They can buy U.S. bonds, but with what are these bonds going to be paid: the very "dollars" that the foreign banks want to unload, and of less purchasing power than the "dollars" spent to buy them.

One thing becomes obvious: the bankers and the government are in this thing together. The banks don’t want people to lose confidence in their scrip, because there isn’t anything else about the money that makes it marketable. As long as people place their trust in it, the bankers can continue collecting the interest. And as long as the people accept it, the government can continue to spend and spend — something they couldn’t do if the money were tangible, and not created with the stroke of a pen, or a touch of a computer key. Modern governments couldn’t exist without fiat. So who is concerned about the rest of us, who are neither bankers nor politicians?

The hand-wringing and lamenting about the trade deficit overlooks one important thing: it is a problem of the rulers’ making, and short of reforming the system, and returning to a Constitutional monetary system, nothing can remedy it. The bankers/rulers see a return to honest money as suicide; a threat to their very existence. They’re right. That’s why nothing is going to be done about it, unless the people do it themselves. What are the chances of that?

Dr. Hein [send him mail] is a retired ophthalmologist in St. Louis, and the author of All Work & No Pay.

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