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Source link: http://archive.mises.org/6168/isnt-the-capital-surplus-a-good-thing/

Isn’t the Capital Surplus a Good Thing?

January 22, 2007 by

The man on the street passionately believes that we ought to sell more stuff to foreigners than we buy from them. But he also believes quite strongly that it’s good if foreign companies build factories here, rather than Americans exporting capital abroad. So when we free market economists point out that the two positions are mutually exclusive, that at least causes the protectionist to scratch his head. Remember: a positive trade deficit must yield a positive capital account surplus, i.e., a net inflow of foreign investment in US assets. FULL ARTICLE

{ 157 comments }

Sasha Radeta January 27, 2007 at 11:45 am

Sam,

Having a liability-free production makes as much “sense” as consuming only what you produce. If you are poor on capital, but you have a great idea for some new products, would it make any sense to stay poor and not to borrow someone else’s capital in order to create your fortune?

Liabilities per se are not the real issue here. The problem here is that some people get so hyped when they discover how useless and absurd any analysis based solely on trade balance calculation is – and they jump to a conclusion that current account balance does not matter. In other words, they are saying that constant net loss (not only liabilities) can be a great thing for an economy.

Imagine a firm that keeps loosing money, year after year, because it invests more in new technologies than it actually gains in assets. How would we rate its performance? There is a physical limit on how long a firm can endure a net loss, and at any rate, it is not a desired outcome (although it maybe an inevitable outcome of heavy investment in something that should produce an account surplus).

Some people also don’t understand that this net loss in current account does not necessarily translate into a capital account surplus, because any capital acquisition (inflow) is balanced by an outflow of capital that was used in such purchases. In other words, you will have a capital account surplus only when the value of your acquired capital exceeds the value of capital that you lost – and current account deficits (net loss) cannot magically yield this outcome.

Sam January 27, 2007 at 7:30 pm

Sasha Radeta, huh? Are you confusing liabilities with expenses? I said any tool whether physical or financial that returns a net profit would be considered an asset. If I used debt as part of running a business and used that debt to make a business more profitable then that debt would be an asset to the business. If that debt was nothing but a burden and would ruin the business then it was a liability. Even if a entity has outgoing expenses if it helps to bring in more revenue it overall is an asset.

Sasha Radeta January 27, 2007 at 9:19 pm

Sam,

Who is confusing expenses with liabilities? I apologize if I was confusing.

You stated this:
“And are liabilities bad? I’d say definitely yes. A liability is something that is causing you a net loss.”

In other words, you viewed all liabilities as something that automatically reduces your profit (expense and nothing else). That is an incorrect view, since liabilities (obligations from past transactions) can be utilized for creation of new assets and they can produce profits (not just loss as you claimed).

You seem to have a strange definition of assets. As you know from the basic accounting equation, Assets = liabilities + owners equity. What any firm does with those liabilities will be reflected in its performance and on income statement. We all know that.

—-

That is not the real issue here.

The real problem in our topic is not the question: “are liabilities bad”. What Dr. Murphy seemingly suggested is that a net loss does not have to be bad. I tried to explain why current account deficit (outflow of financial assets, which is one part of our total capital) does not necessarily translate into capital expense surplus (just as net loss of a firm does not suggest increase in its total capital). I illustrated my position with some concrete examples.

Sasha Radeta January 27, 2007 at 10:12 pm

In other words, there is no direct analogy between current account deficits (which can be viewed as an income statement issue) and capital account surplus (balance sheet issue). There is also no point in talking “are liabilities bad” (balance sheet issue again) in order to prove anything about current account deficits (negative income).

PS
Sam, only the fulfillment of liabilities can be viewed as an expense (that is when you no longer can use these assets). As long as you hold liabilities, there is no ground to claim that they will cause you a net loss, or net profit. They are just assets for all we know.

Sam January 28, 2007 at 12:09 am

Well I just say this and no more Sasha Radeta, your definition of assets & liabilities are the standard bookkeeping version. Assets are something the business owns and a liability is that which the business owes money. Whereas Robert Kiyosaki’s definition was in a financial/investment sense. Namely an asset provides a positive cashflow and/or appreciates ahead of its costs. And then a liability is one that causes negative cashflow and/or fails to rise in value ahead of the costs of buying and maintenance. Hence the old view of the home being an asset relied on the bookkeeper’s version whereas in the financial/investment sense the home is a liability because it’s costing you money to upkeep.

Sasha Radeta January 28, 2007 at 12:41 am

Sam,

I appreciate your attempt to reinvent accounting, but there is a good reason why liabilities are also recorded as assets (that is the only way to evaluate true potential of some firm, because liabilities can be utilized for production… of course, the ownership structure of assets is also very important and that is why we have ratios that measure liquidity and leverage).

At any rate, however you view liabilities that does not change that you were incorrect in stating that liabilities must produce a net loss.

Also, it does not change the fact that any discussion about “are liabilities bad” (balance sheet issue) is completely misguiding and useless in the contest of current account balance (income statement issue). Likewise, current account deficits (loss of capital in financial assets) cannot be equated with capital account surplus – because these deficits only represent the outflow portion of that account, without determining the value of capital inflow.

christian June 15, 2007 at 2:50 pm

china doesn’t need to dump/sell there existing reserves besides they won’t find a buyer

the majority of there reserves are in SHORT -term bonds so they will let these mature and continue to DRASTICALLY CUT NEW PURCHASES

not sure what the lag time is between reporting of updated reserve totals but they will go down not from selling but from old bonds maturing and new bonds not being bought

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