Although Austro-libertarians have always been staunch supporters of free trade, many are worried over the unusually large current account deficits of recent decades. Even though they concede that a truly free market trade deficit would be perfectly benign, they believe that the current “global imbalances” in trade patterns largely reflect the behavior of central bankers, rather than voluntary exchanges between private individuals across the planet. Are they right? FULL ARTICLE
Source link: http://blog.mises.org/6260/trade-deficits-and-fiat-currencies/
Trade Deficits and Fiat Currencies
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Thanks Gabriel for Reisman’s article.
I asked RogerM earlier to explain Reisman’s concept in his own words unless the logic was so convoluted that it couldn’t be done. Well, not only is Reisman’s logic convoluted but pure sophistry, and based on a total misunderstanding of the concept of GDP.
RogerM,
Read a 2000 BEA article on gross product. This is not applying Reisman’s weird notions at all, but simply an attempt to improve the measurement of GDP. Maybe they’ve gone weird since 2000. Do you have a more recent BEA reference?
David, I loved North’s article! It’s great! But I don’t see how it contradicts RPM’s article on the trade deficit.
North wrote: “In contrast, Austrian economists – at least those who actually believe what Ludwig von Mises wrote about the business cycle – are not optimistic, because central bank monetary inflation (China’s and Japan’s) have created an international economic boom, which must inevitably be followed by an international economic bust.”
I agree completely and I’m sure RPM does, too. A bust has to come and soon. However, I doubt that North assumes that every single last dollar of the trade deficit is caused exclusively and entirely by the Fed’s inflationary policies. That would be a very simplistic view of economics and North is too smart for that. For empirical evidence, look at the inflation of the 60′s and 70′s and see how small our trade deficits were in those decades.
The world has experienced central bank created booms and busts for centuries. The sooner the next bust comes, the better, and it will come. But when it does, I’ll be sending in posts about how high the trade deficit remains, in spite of it.
Alex: “Read a 2000 BEA article on gross product. This is not applying Reisman’s weird notions at all, but simply an attempt to improve the measurement of GDP.”
Yes, GO is an application of Reisman’s ideas, which are no different from Garrison’s, Huerta de Soto’s or Skousen’s. Reisman provides an intricate proof, for the hard-headed, of what Huerta de Soto and Skousen summarize.
As I asked above, where does the production of Company B in your example above show up in the final GDP? It doesn’t. That’s all Reisman, or anyone else is saying. GDP measures the market value of the final products, as you wrote, nothing more. Reisman using accounting to demonstrate this. In sum, GDP leaves out a lot of economic activity that we should be interested in and is vital to understanding how an economy works.
GDP is great for promoting socialism and has done a marvelous job.
RogerM,
First Murphy does a self-confessed “hatchet job” on Peter Schiff for his very principled (i.e., Austrian) stance against the sustainability of trade deficits, arguing, on the contrary, that “a country could experience trade deficits indefinitely.” Then he follows that up with this piece, saying not only that deficits don’t matter but that they are actually GOOD: “Again to avoid confusion: Of course the actions of the Chinese government are distorting world trade patterns and US interest rates. But it is distorting in our favor.”
On the contrary, it is distorting precisely as Gary North said by turning us into “the world’s ‘inner city ghetto’ society: more consumption than production.”
That’s what Robert Murphy doesn’t get; that’s why he isn’t a true Austrian; and that’s why LvMI is wrong to publish his work on this subject.
RogerM,
You keep asking things like, “where does the production of co. B in your example show up in the final GDP?” And I keep explaining where it does. This is my last effort in this regard.
Suppose you weed 40% of a garden and I weed the other 60%. What did we produce? One weeded garden. How did I include your contibution? By adding your 40% onto my 60%. After all, I didn’t say we weeded only 60% of the garden.
Now, would you say our gross output was 160% of a weeded garden? Or 140% of a weeded garden? I think you would say that we produced one (100%)weeded garden. By the way I received $100 for that weeded garden job and I gave you $40 for your contribution. What meaning does it have to say that we produced $140 worth of weeding? It makes no sense, because we didn’t.
David White,
I really think article by RPM was very worthwhile in airing a particular viewpoint. You and I disagree with the viewpoint and we get our go at explaining why. This article has also caused a good airing of what GDP is and isn’t and a discussion of something I was hitherto not aware of called GDO. I personally don’t care if one Austrian criticizes another’s logic. In fact, I think its intellectually healthier than if this didn’t happen.
Alex MacMillan,
My point is that this is not about one Austrian criticizing another but about a pseudo-Austrian attacking a true Austrian on an Austrian website.
That said, if responses like mine (and I am hardly alone) have served the purpose of exposing the error of Murphy’s ways, then I would consider that the silver lining of this otherwise dark cloud. I would hope, however, for a follow-up article by a Gary North or a George Reisman to make it clear that deficits do in fact matter and that as out of control as they are, the wise individual would protect himself by stocking up on precious metals (which had quite a day, by the way, despite the relentless efforts by the powers that be to suppress them).
David,
Your concern about fiat money is correct – however, what you say about trade is not so sound, IMO.
Trade deficits are considered a problem only by protectionists. Trade deficits are the excuse to regulate trade…for the common national good, of course.
Credit expansion allows people to buy things using money that doesn’t exist. Whether the goods are produced in China or in the US is beside the point.
Juan Garofolo,
“Credit expansion allows people to buy things using money that doesn’t exist. Whether the goods are produced in China or in the US is beside the point.”
I couldn’t have said it better myself, though as I DID say:
“[S]ince all credit needs debt to fulfill its function, a fiat-based monetary system is accordingly a debt-based monetary system, NO MATTER WHO THE CREDITOR IS. Why? Because the notion that domestic borrowing means that “We owe it to ourselves” is absurd, as future generations are obviously not us anymore than foreigners are.”
But let’s let former IMPF and now Harvard economist Kenneth Rogoff have his say:
“Rogoff said surplus countries are willing to keep pouring money into U.S. coffers because they aren’t able to use all their own savings. ‘The net result is that money is being parked temporarily in low-yield investments in the U.S., although this cannot be the long-run trend.’ ”
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_berry&sid=aWuQCgZ0ewDU
“cannot be the long-run trend.”
I don’t know about you, but contra Robert Murphy, that sounds like unsustainable to me.
Robert P. Murphy
“All Austro-libertarians can agree that central banking, as well as government barriers to trade, are immoral and inefficient. Yet these a priori principles do not immediately inform us as to the strength or weakness of today’s economy. Contrary to the doomsayers, I do not believe that the world financial system, and the US market in particular, is headed for certain disaster.â€
I think it is extremely good and honourable that you have pointed out that you do not think that we are headed for a financial disaster. I think it is honest and true. The essential thing is truth seeking and not to propagate twisted “conclusions†that serve our interest and values. To be dishonest is also counterproductive as it will give libertarianism and the Austrian School of Economics a bad name and reputation.
The truth and nothing but the truth should be the loadstar.
Thank you very much!
Björn Lundahl
Göteborg, Sweden
Bjorn,
And the truth is that non-asset-based (i.e., work-free) credit can be issued ad infinitum, such that trade and budget deficits can rise without limit?
Author Clyde Prestowitz thinks otherwise:
“The US right now is absorbing 80 per cent of global savings. Well when you hit 100 per cent, the music stops and leading figures, people like Paul Volcker, the former Chairman of the US Federal Reserve, people like George Soros, the great speculator, have all made statements that they fear a major financial crisis within the next five years because the system is unsustainable.
“There are a lot of different scenarios, but the problem here is that everybody is holding too many dollars, so as soon as one player begins to sell, everybody starts rushing for the door. So you could get a cascade effect.
“Actually for me, the real nightmare scenario is that nothing happens, because what that means is that US debt continues to mount.
“We’re now adding to our international debt at the rate of about $700-billion a year, so in a very short time at that rate, US international debt is equal to GDP or maybe even exceeds GDP.”
http://www.abc.net.au/worldtoday/content/2005/s1446716.htm
You argue that trade deficits bring foreign investments and that the loss of jobs is good because it benefits the American stockholder. Aren’t these American stockholders benefiting from an artificially strong dollar? Might they not be hurt should the Chinese government dump its stockpile of dollars? Aren’t trade deficits the result of the Chinese government keeping the dollar artificially strong and not the result of genuine free trade? Is this really a gift since it is artificial and not natural? Is a bomb wrapped in shiny paper really a gift? Wouldn’t it be better to have a currency that is not as easily manipulated and naturally stable? Is it good for the US government to be operated like a private business? Do governments create wealth in goods and services? What services other than social programs and an aggressive foreign policy might the US government offer to foreign governments in return for their investments? How about more US fiat gold of which purchasing power increases as the stockpile grows? (Currency not in circulation delays the effects of inflation.) How about UN votes, public real estate, transportation and utility infrastructure, technology and military bases, or even health, education, and correction facilities?
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