We often speak of international trade as if it were an unfathomable mystery, opaque to the understanding of anyone without an economics doctorate. That’s particularly the case in exchanges over trade balances, a contentious topic these past few decades. That America should have a negative balance of trade is regarded as a shameful thing, probably the doing of some shadowy international conspiracy.
But things are simpler than they seem. In point of fact, a trade imbalance vanishes the moment we include the two components that are inevitably omitted in discussions thereof:
- Time;
- Debt.
Much that we argue about today was never a subject of interest during the specie-standard years. It was appreciated back then that when we exchange money for goods, that money is a claim on a recognizable good: the gold or silver that backed the money. One who values such claims will trade what he can produce to gain more of them. Yet the only significance of those claims is that they can be exchanged for:
- Goods made by the purchaser of your goods; or:
- The backing commodity: e.g., gold or silver.
Thus, every trade is implicitly balanced – and therefore all trade is implicitly balanced. No one can claim he was “done dirty,” for he has exactly what he wanted out of the trade.
Today, no nation is willing to back its money with gold or any other commodity. So in effect, money is today a form of debt: the ability to compel “payment” in the form of purchased goods or services later on. You’d think that no one would be fool enough to accept a nation’s money if its producers produced nothing of value.
But there is debt: a promise to pay tomorrow for what one purchases today. Money that cannot be redeemed on demand is a kind of debt. The seller accepts it in confidence that he’ll be able to purchase something with it later on.
Of course, there are other kinds of debts: IOUs, promissory notes, loans, and certain investment vehicles. One that’s currently of significance is behind the U.S. national debt: at this time, approximately $37 trillion.
You’d recognize a portion of our public debt if it were in front of you: a Treasury Bill. Treasury Bills are promises to pay the face value of the bill, with interest that accrues over time. Individuals, investment institutions, and other nations hold a great many such bills. People accept such bills because they’re confident that:
- The face value will be paid off in time;
- The interest payments make the wait for payoff worth enduring;
- The money received for the bill, either in interest payments or when the face value is paid off, will purchase goods and services of sufficient value.
Nations accept them for the same reasons.
If we treat the debt – face value plus interest payments – as a commodity of itself, there is no trade imbalance. We’re simply unused to seeing a debt obligation in that light.
Of course, there’s an assumption that’s seldom made explicit: item #3 in the list immediately above. Some day, the money represented by the debt must be redeemed in goods and services, since it’s not backed by anything else. One who doubts that those goods and services will be available would not agree to accept a debt instrument as payment for his goods and services.
The above, though skeletal, should suffice to explain money / debt as a component of the balance of trade. Other intangible reasons – e.g., influence, good will – for accepting a debt instrument are beyond the scope of a brief essay.
Sadly, there is a fly in the ointment, and it’s the size of a hippo: inflation. When a national government borrows, it increases its money supply, thereby reducing the purchasing power of every unit. Thus, the dollar / pound / franc / deutschmark / yen borrowed has a greater purchasing power than those that will be used to repay or service the debt. That forces the interest rate upward. Lenders are not fools, especially sovereign nations.
International currency manipulation is powered in part by the awareness of inflation and its effect on sovereigns’ debts. Weimar Germany, Peron’s Argentina, and Mugabe’s Zimbabwe are recent enough to make financiers wary. A national government concerned with maintaining the soundness of its money, such as the Trump Administration, will be wary of it too.
When economists lament America’s negative balance of trade, they have debt in mind even if they never mention it. America’s money in the hands of non-Americans is debt. It must eventually be “redeemed” in goods and services. Money seen as swiftly weakening is a harbinger of a poorer future – not because the money itself is wealth, but because a deteriorating money will be accepted less and less willingly by sellers of goods and services. Remember that labor of any kind is a service sold for money.
Debt, whether in the form of unredeemable dollars or more obvious, repeatedly “refinanced” debt instruments such as Treasury Bills, is the phantasm that really animates all concern about America’s balance of trade. Yet the phantasm is no optical illusion. It’s the specter of national default in the form of dollars multiplied so recklessly as to become worthless. Remember what became of the currencies of the Continental Congress and the Confederacy.
