The United States, like most other countries, use a method of double-entry accounting to track certain aggregate statistics known as National Income Accounting. One of the statistics tracked is the balance of trade. The balance of trade reports the difference between imports and exports. When imports exceed exports, we are said to have a trade deficit. When exports exceed imports, we are said to have a trade surplus. When the two equal, trade is said to balance. Technically, the balance of trade refers to imports and exports of both goods and services, but so much attention tends to fall just on the trade of goods, or what is called the “Merchandise Balance of Trade.”
Confusion abounds over what the balance of trade is. Even David Hume and Adam Smith note that the concept does far more harm than good. Hume discusses how those “ignorant of the nature of commerce” misinterpret the balance of trade (see his essay “On the Balance of Trade”). In the Wealth of Nations, Smith goes even farther, calling the whole concept “absurd” multiple times (see pages 377 and 488 in the Liberty Fund edition). Much of his case against protectionism and mercantilism in Book IV is aimed against the balance of trade as a whole.
With the inclusion of the balance of trade into National Income Accounting, the confusion has persisted. The connotations of the words “surplus” and “deficit” (coupled with the accounting conventions of pluses and minus) give the impression to those who do not understand the balance of trade that deficits are bad while surpluses are good. But, digging a little into the accounting shows that 1) “deficits” and “surpluses” are value-free and 2) referring to these as “trade deficits/surpluses” is something of a misnomer.
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If anything, other things equal, trade surpluses are worse than trade deficits.
For the US, because there a trade deficit means they can export USD inflation.
That’s what it would mean for anyone, no?
The reason the US has been able to sustain a trade deficit is that there’s been so much dollar demand.
No, not every country can print the world reserve currency, to finance trade deficits.
Even for the US it is ultimately a toxic death trap.
When the petrodollar loses its dominance as the global reserve currency.
This only happened to the British pound when the Suez canal crisis exposed the British as being militarily incapable of enforcing control of strategic shipping lanes.
Hormuz could be the death knell of the petrodollar.
Regardless the decline of the USD-'petrodollar' is already well advanced...with US government debt servicing exceeding military expenditure and no credible pathway to ever repaying the debt.
The crucial line here is-
Investment will come from firms (note: it can be financed by borrowing, but doesn’t have to be) and individuals making large capital purchases, like a house. If these individuals are using Investment to create long term productivity enhancements, then a trade deficit is a signal of good things. But, if borrowing is going on where there are no such productivity advancements, then the trade deficit can be a signal of bad things. Regardless, and this is the big takeaway here, *the balance of trade has little to do with trade at all. It is determined by much larger macroeconomic factors.
Neoliberal 'reforms' to the wests banking regulations removed the need for commercial banks to only fund productive investments- since then surprise surprise a vast quantity of debt burden has been directed upon non productive assets, primarily housing.
The west is declining in competitiveness in part at least because its bankers can issue debt toward any purpose and not only productive ones where the increase in productivity will counterbalance the debasement fiat debt issuance entails.
Under neoliberalism parasitic bankers came to own your democracies.
The decline of western civilisation was in large part enabled by our collective failure to stop this parasitic misuse of fiat capital issuance...or to even understand it in most cases.