Leon Louw has an article in today’s Business Day titled, “Econobabble has everyone worried over nothing.”
Leon makes an essentially sound point, which is that the notion of a trade ‘deficit’ or ‘surplus’ is largely bogus. Louw is particularly debunking those (accountants and economists) who believe imports are a ‘bad’ and that paying foreigners for imports represents some kind of harmful macroeconomic ‘leakage’.
Of course, if people sell their money to foreigners in exchange for goods and services, they clearly value those goods and services higher than than they do money balances, while foreigners clearly value holding money balances more than they do their goods and services. This is why trade is win-win, and why all trade is, in a sense, a surplus. That is, trade enhances value for all who participate in it (and even usually for those who don’t participate directly).
Unfortunately, Leon leaves out the most important element in post-Bretton Woods trade flows, which is the fiat-debt problem. Any view on trade has to take into account the effects of a hyper-elastic money supply.
All trade ultimately is an exchange of value. Things cannot be bought with nothing, only with other things or services. When we buy more from foreigners than we sell to them, something is necessarily filling the ‘value gap’. In South Africa’s case, this value gap is being filled largely by us selling foreigners lots of paper assets which are part-ownership titles on companies’ capital (stocks) and claims on future taxes of SA taxpayers (government bonds).
If a value gap remains after asset sales it is because it is being filled in the short term by creating money out of nothing, either by the central bank printing it directly or by banks creating it through fractional lending. This money is used to buy foreign currency and then used to buy foreign goods and services. Of course, this method of filling the funding gap only works until foreigners realise all we’re doing is using money created out of nothing to buy their real stuff. It makes us appear richer than we really are. Once they start to realise this, they begin to discount the value of our money, and our money weakens against other currencies (exchange rate depreciation) and against goods and services (price inflation) until we can no longer use it to buy the same living standard as we once could.
So while we might initially think it is a sweet deal to buy real stuff with money created out of thin air, in reality there will be a price to pay. What is that price? Inflation tax, a commensurate loss of living standard, and debts that need repaying which necessarily means a reduction of consumption and/or harder work in the future.
To put it simply, Leon is right that imports per se are not a problem – indeed, they’re good in the sense that they imply that someone subjectively got more value (goods and services) than they gave up (money balances) – but he’s wrong (or at least omits this crucial point) in the sense that the trade deficit and currency weakness is SYMPTOMATIC of underlying monetary debasement.
So the trade deficit in aggregate is more than just somebody else’s ‘individual problem’, and affects us all because monetary debasement and its affiliated excessive credit growth under artificially easy borrowing conditions create harmful boom-bust cycles that distort the structure of production and create massive intertemporal discoordination and resource waste, not to mention harmful and politically dangerous recessions that only prompt more harmful, ‘corrective’ government policies.
A persistent trade deficit shows that South Africa is addicted to inflation and debt. More specifically, it shows that we’re addicted to debt created out of thin air. This is indeed a big problem that we should all be concerned about, especially since governments and central banks like to try fix these problems by destroying the currency even further and creating increasingly harmful real economic effects in the process.
