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Source link: http://archive.mises.org/7124/perpetual-trade-deficits-can-be-good/

Perpetual Trade Deficits Can Be Good

September 11, 2007 by

Notwithstanding its appeal to cynical anti-government readers, I think Schiff’s book reinforces popular “old school wisdom” that is simply false. Namely, Schiff buys into the argument (also made by Paul Craig Roberts) that a country needs a solid manufacturing base and trade surpluses to remain a dominant economic power.

Although I do agree with Schiff that the dollar is poised for a (perhaps sharp) fall — and I also endorse his advice to investors for protecting their wealth in this environment — I think his arguments don’t hold up in general. For the remainder of the present article, I’ll try to demonstrate the weaknesses in Schiff’s case.FULL ARTICLE


Fundamentalist September 11, 2007 at 11:46 am

Very interesting! Thanks! Is this similar to the “Dark Matter” argument? http://www.businessweek.com/the_thread/economicsunbound/archives/2006/02/intangibles_pro.html

Kristian Joensen September 11, 2007 at 11:56 am

This is very very great article. Thanks alot for it.

iceberg September 11, 2007 at 12:13 pm

I’m afraid I don’t fully buy either sides argument – While it’s illogical for consumption to take place without production (manmade or natural) temporally preceeding it, to take this sound normative preposition and transform it into an enforcable moral duty ala the protectionist doctrine is presposterous. That is the anarchist side of me speaking, since I recognize no authority, country, or nation, to have any say whatsoever in what activity that I or anyone else choose for ourselves, even when it may result in self-destructive behaviour.

On the other hand, the dear professor’s sucessful deficit-running Libertopia may only exist in a world in which the effect of worldwide government gives Libertopia a comparative advantage, in that it would be attractive for investment and banking purposes. Such a world we have today; so yes, the “sun-tanning” Libertopia is quite conceivable under these circumstances.

But if/when humanity were suddenly to wake up one day and cast off the shackles of statism, the comparative advantage that the Libertopia had over the rest of the world would disappear. In such a scenario, Libertopia would lose its ability to consume from abroad without first producing goods which are valued elsewhere.

Pepe September 11, 2007 at 12:30 pm

“But where the Schiffian analysis goes astray is that the comparative advantage of the islanders would almost certainly consist largely of intangible financial services…”

I always wondered why Schiff never opened a factory to produce heavy tangible goods. Yet, he adds to the problem by providing financial _services_ and producing ‘nothing’.

Jean Paul September 11, 2007 at 12:37 pm

Every libertarian trade is win-win, so how can you ever measure a net ‘deficit’? Of course the term has a technical definition, but I think a meaningless one.

In a trade I lose my A and gain a B; and you lose your B and gain an A.

My net value is X = B minus A, and your net value is Y = A minus B. Subjectively value X and Y, and to your surprise discover that every uncompelled trade has positive values for both. No ‘deficit’ that I can see.

The above is notwithstanding buyer’s remorse, a consequence of intertemporal information asymmetry which may apply on a case by case basis. But long-term, the net of all Xs and Ys trends positive for all libertarian actors.

The technical definition of ‘trade deficit’ must somehow fall within the above, but I fail to see how that definition enlightens anything but a collectivist discussion.

Alex MacMillan September 11, 2007 at 1:19 pm

Certainly it is not necessary for a country to produce manufactured goods as long as people produce something that is valued in trade. Valued services, for example, are simply traded for the desired quantity of manufactured goods produced by others. I have always worked in the service industry and have never had trouble selling my services for manufactured goods.

And Libertopian financial assets, of course, may be willingly accumulated indefinitely by foreigners(current account deficits may be run indefinitely), as long as such financial assets are properly serviced (interest and dividends paid) and the financial assets maintain their real value, as they will if Libertopia continues to produce enough things (e.g., services) valued by foreigners.

For example, suppose I own 100 oz of gold worth of common shares in a Libertopian company and I and other foreign investors require an 6% return on such an investment. As long as I and others believe the Libertopian company will earn enough gold profits through its sale of some service or other to provide us with our 6% return, investors (domestic and foreign) would be happy and our financial investment will maintain its market value. We don’t care that our company is not a manufacturing company. However, should the market value of the services provided by Libertopian companies fall relative to the goods and services provided by foreign companies, and, consequently, should the expected future profitability of Libertopian companies fall, then there will be a net outflow of funds abroad (a capital account deficit will ensue and a current account surplus with exports exceeding imports will result).

Of course, the U.S. situation today (with its large current account deficits) is largely not the result of U.S. profitable real investment opportunities attracting foreign funds, but instead has largely resulted from U.S. consumer and government borrowing. To the extent that this has occurred there are no new productive capital assets to match this increase in foreign liabilities, which when serviced will mean lower future U.S. consumption (e.g. higher taxes will be required to service the government debt).

There is one curious segment to Murphy’s paper, as follows. Murphy states, “These two factors would combine to allow islanders to borrow from abroad at much lower interest rates than they could lend from abroad. A French investor would be willing to invest one million euros in an island bank that he expected to earn (once adjusting back from gold to euros) 1% per year, while the bank could, with the same risk, invest these funds abroad and earn an expected return of, say, 5% per year in euros.”

The difference between the 5% rate at which non-Libertopian borrowers pay for funds and the 1% risk at which Libertopian banks pay for funds must be to account for extra risk. Therefore there is no arbitrage profit (once risk is taken into account) for the Libertopian banks to earn from such foreign investment.

Brian Gladish September 11, 2007 at 2:55 pm

It seems to me that I remember reading (many years ago) that Austrians did not believe that trade deficits can exist due to the fact that in any transaction goods and services flow one direction and some compensation flows the other (gold or some fiduciary media).

The unfortunate fact for U.S. trading partners is that we are huge exporters of dollars, and we have that great technology that Bernanke referenced – the printing press – that can produce an inexhaustible supply. Bretton Woods II has made it possible for the Federal Reserve to stamp “100 oz.” (or any number for that matter) on 1 oz. gold bars and get away with it – for now.

M E Hoffer September 11, 2007 at 3:29 pm

Isn’t this: “The unfortunate fact for U.S. trading partners is that we are huge exporters of dollars, and we have that great technology that Bernanke referenced – the printing press – that can produce an inexhaustible supply.” What Schiff is really talking about(?) And, The Key difference between today’s USA and Rothbard Isle?

David White September 11, 2007 at 3:38 pm

For all his talent and expertise in the field of economics, Robert Murphy is incapable of understanding what Schiff and other true Austrians (including Jean Paul above) obviously do: namely, there can be no “trade deficit” in a sound-money economy (a true one, not the phony 19th-century variety) for the simple reason that both parties in a typical trade gain, else they wouldn’t trade at all. Thus, it matters not at all that the owners of a large amount of gold moved to an island to trade in freedom with the outside world; all that matters is that they had one good (in this case gold) to exchange for other goods, each exchange resulting in a two-sided gain that is accordingly devoid of any kind of “deficit.”

Furthermore, whatever comparative advantage the island enjoyed as a result of its economic freedoms would likely narrow greatly, if not disappear altogether, in the aftermath of the fiat collapse elsewhere (as will in fact happen in the not-too-distant future), meaning that in order to survive and prosper, the island would eventually have to diversify its economy. (Could they do so soley through selling services? Maybe, but I doubt it.)

Moreover, I say “its economy” advisedly, since in a truly sound-money, free-market economy, there would be no “economy” per se, just the varying prosperity of the individual members of the society. Yes, their prosperity could be measured, assuming there were some means of doing so without violating the financial privacy of the members. But even so, all it would be measuring is the flow of gold vis-a-vis other goods, not whether there was a trade “deficit” or “surplus.”

This isn’t so in a fiat-based economy. For political boundaries notwithstanding (which wouldn’t exist in a sound-money, free-market — i.e., private property-based — economy), every issuance of non-asset-based credit creates a real and immediate deficit in that no work (beyond the negligible cost of printing currency or creating it via a computer keystroke) is done. That is, no money was actually created, since money, properly speaking, isn’t just a medium of exchange; it’s a GOOD used as a medium of exchange. And for any economic good to be created (as opposed to a free good like air), work of one sort or another must be done, whether that be the mining of gold, blacksmithing a plow, or baking a loaf of bread.

For some reason, Robert Murphy can’t get this simple fact through his head and instead yammers on about “trade deficits” that are a purely statist affair resulting entirely from the corruption of money amid a worldwide regime of artificial — i.e., non-econommic — boundaries.

Dima September 11, 2007 at 3:46 pm

Schiff’s island analogy makes sense, however I get lost in the economic discussion of the libertarian island utopia.

Would be possible to come up with something as simple as Schiff’s analogy that would clearly illustrate how a perpetual (growing) deficit is possible?

What would it look like with 5 Chinese and 1 American on island?

Thank You

Paul Edwards September 11, 2007 at 4:54 pm

“There is nothing wrong with a trade deficit. In fact, there is no payment deficit at all. If U.S. imports are greater than exports, they must be paid for somehow, and the way they are paid is that foreigners invest in dollars, so that there is a capital inflow into the U.S. In that way, a big trade deficit results in a zero payment deficit.”

M.N. Rothbard – MAKING ECONOMIC SENSE – Nine Myths About The Crash – Myth 4


Joseph Huang September 11, 2007 at 5:19 pm

What happens when all countries go libertarian? Surely not every country can have a “perpetual trade deficit.”

Alex MacMillan September 11, 2007 at 5:25 pm

Dima: Suppose a Murphy’s/Schiff’s island has one company (Liberty Inc.).(You can think of many companies, if you like, but one will do the trick.) To fit with the current discussion, suppose Liberty Inc. produces computer services that are highly valued within the country itself and abroad. Because of the expected future profits from Liberty Inc., foreigners have purchased 100 ounces of gold worth (say 100,000 Island dollars worth) of its shares. Suppose, for simplicity, that that is the only capital account transaction for that year, Liberty Inc. engages in no exports, and the received foreign exchange is used to purchase imports. The island would have a current account deficit of 100,000 island dollars that year. (If the Islanders imported only goods and no services, the island’s trade deficit would also be 100,000 island dollars that year.)

In subsequent years, suppose that dividends flow to foreigners, but that due to the continual growth in profitable opportunities of Liberty Inc., each year greater additional foreign investment in Liberty Inc. takes place than the outflow of dividends. Each year the island would have more foreign funds coming in for new investment than flowing out to service the existing foreign investment. In this case, each year Island would experience a capital account deficit, with no fraud, with Islanders and foreigners both quite happy with the situation.

Alex MacMillan September 11, 2007 at 5:44 pm

Jean Paul and David White: If “all” parties affected by every trade transaction benefit, then any attempt to account for a bunch of such transactions as a “deficit” and something anyone should be concerned about is obviously wrong.

When third parties affected by trade transactions are hurt by the transactions then it is not at all clear that every transaction is “on net” beneficial.

For example, how about having a free market in nuclear weapons? On a more mundane level, surely you would agree that some transactions that cause unpriced pollution can hurt third parties by more than the net benefit to the parties doing the transacting.

And surely you would agree that government initiated transactions do not always cause net benefit. If so, do you not think that part of the current U.S. current account deficit reflects transactions that have been carried out by government where the costs exceed the benefits (ex ante, let alone ex post).

Adding up a bunch of numbers as in balance of payments accounting and arriving at a “deficit” figure (whether on trade, current, or capital account) does not in itself reflect a bad situation “on net”, Just as finding someone 98 years old dead in their bed does not. However, in analyzing the deficit, one may conclude that at least part of it is undesirable, just as finding a bullet hole behind the ear of the 98 year old would also be cause for alarm.

Joseph Huang September 11, 2007 at 6:09 pm

All voluntary transactions benefit the two people involved in the transaction.

Whether or not the transaction harms other people would be solved in a free-market court system. If my neighbor dumps his trash in my property, I should be able to sue him and win. If my neighbor burns his trash and then gets my laundry dirty, I should be able to sue him and win. In the case of nuclear weapons, it is likely that thru voluntary contracts, just about everybody will agree not to own them.

David White September 11, 2007 at 7:05 pm

Paul Edwards,

I’m not sure what point you’re trying to make by quoting Mises here, but surely a “zero payment deficit” is just that and therefore in no way constitutes a “trade deficit” as Robert Murphy defines it.

In any case, if the dollars were really dollars — which today they are anything but: http://www.csamerican.com/stuff.asp?k=25 — we’d be talking about a sound-money economy wherein any notion of a “trade deficit” would be nonsensical.

quincunx September 11, 2007 at 7:30 pm

Sometimes I think RPM is a moron.

The biggest investors of our trade balance are not sovereign individuals, but governments. His analysis falls flat. A real analogy would be a local gang having a fire sale on domestic assets, and a foreign gang siphoning off purchasing power to acquire them.

The current situation with china is not sustainable. The chinese government robs their citizens of something like 30% purchasing power, and then uses that to buy us government securities.

Eventually that will stop (some speculate it already has), and then China will use their huge sovereign funds to acquire strategic US assets.

If China can acquire those assets, it can develop its own Capital.

If China cannot acquire those assets, well that proves that the US was a poor banker, and its services will no longer be needed. The US will add another defacto default to its already crappy record.

Our shadow government understands this fact, which is why they have concocted the North American Union – to naturalize the Mexican labor force in order to produce goods ‘locally’.

The only problem with Schiff’s analysis is that he has not included the countervailing NAU as a force that will mitigate the greatest depression we will ever have.

For those that doubt that the NAU will pass, should remember that the people who wrote and adopted the Constitution had no authority, and the majority of the public were against it.

We had a coup then, and we will have a coup now.

David White September 11, 2007 at 8:51 pm


Robert Murphy isn’t a moron; he’s just sadly misguided on where the real “trade deficit” lies. But I couldn’t agree with you more on the NAU, which, as I’ve said here numerous times previously, will be crammed down the American people’s throat amid the “national emergency” engineered by the Bush cabal’s coming attack on Iran.

Bottom line: The status quo is untenable; the powers that be know it; and rather than throw in the towel on the American welfare-warfare state, they (i.e., both factions of our one-party system) will attempt further centralization rather than the decentralization that the world is begging — and dying — for.

johng September 11, 2007 at 9:53 pm

If Jones trades with Yang what business is it of anyone to interfere? Individuals should be free to trade without government interference.

This is liberty in action.

We import much more from Canada into the US than China but the conversation is always china, china, china.

If Yang then buys real estate from Smith or bonds from a company or the Federal Treasury, so what? How is that different than Jones buying bonds?

US manufacturing output is higher than ever.

quincunx September 11, 2007 at 10:11 pm


Yang is not buying bonds, Yang’s government is buying bonds.

Americans don’t like their government to be selling bonds. Selling bonds implies that the government is going to do something useful with that money – we know that governments can’t do useful things.

The US government is in effect a coercive subprime borrower, and the Chinese government is a confiscatory subprime lender.

When the US defaults, the rest of the world will suffer a little, but then they will just negotiate contracts with other players. Just look at what China-Russia-Iran-Venezuela-Africa are doing and you’ll understand why the US is threatening them. It seems to me that these economies are catching on to the greatest con job in world history – which is why we are vilifying them.

Schiff is correct in stating that the US is the caboose that the rest of the world drags around, contra the propaganda you hear about the US being the engine of growth for the world.

D White,

Mayhaps RPM is not moron, but what would you call someone who insists on talking about ‘trade deficits’ in a hypothetical philosophic sense rather than THIS TRADE DEFICIT and the underlying fundamentals surrounding it?

Irrelevant? Insensitive? Academic Masturbation?

How can an Austrian confuse Dollar Hegemony with Capital Surplus?

M E Hoffer September 11, 2007 at 10:35 pm


with this: “How can an Austrian confuse Dollar Hegemony with Capital Surplus?”

The Nail on the Head.

Allen Weingarten September 12, 2007 at 9:11 am

Perhaps Murphy is noting once again that value is metaphysical, and that the contributions to production are not solely physical. That is, initiating, planning, organization, and cogency are as much a contributor to the value developed as are resources and physical labor.

It is the labor theory of value, with its intrinsic view of a product, that leads to the error of ignoring what is invisible.

Jean Paul September 12, 2007 at 9:50 am

So does the trade deficit observation really boil down to “our overlords are making bad trades on our behalf”?

Is the problem that our overlords are getting it wrong, and so we need to monitor them with macroeconomic statistics, and have public discourse around it, and try to democratically shape policy, to help guide our overlords to get it right?

Or is the problem that… we just shouldn’t be ruled by overlords?

Steven Capozzola September 12, 2007 at 10:33 am

The bottom line is still jobs. We’re losing good-paying manufacturing jobs and the associated tax revenues these people once contributed. Lost jobs is not a good thing.

Alex MacMillan September 12, 2007 at 1:44 pm

Jean Paul: Private transactions for the most part benefit all parties affected by the transaction, but such is certainly not the case when trades are carried out by agents on behalf of either buyer or seller.

Government decision makers carry out many transactions on our behalf that do not benefit us more than the tax money expended. In other words, government decision makers are really bad agents for us. And given how much money governments tax and spend, there are many trades carried out that do not benefit both buyer (taxpayer via the government agent) and seller.

Since government spending, especially debt-financed government spending, tends to create current account deficits, certain amounts of such deficits may indicate “bad trades,” that is trades that have harmed the taxpayer on whose behalf these trades were carried out. And this is certainly the situation in the U.S. today as much of the present current account deficit is government spending generated.

Jean Paul September 12, 2007 at 1:44 pm

“We” are losing jobs?

None of the We’s (excuse the grammar; ‘Wes’ didn’t look right) of which I consider myself a member are losing any jobs.

…By which I mean if any of my friends, family, acquaintances, or anyone I have a remote amount of respect for loses their job to technological and economic progress, they just upgrade to a newer, better job.

What sucks is that they’d probably rather take the vacation… but overlord-created wage slavery kind of forces them to keep working. Who thinks it would be a worse world if no one was forced into a job, and could just live secure and happy and provided for by all the affluence and abundance modern technology makes possible?

Meanwhile the overlords are losing tax revenue?

I’m ok with it.

Jesse September 12, 2007 at 3:20 pm

Alex, the does not behave in any sense as an “agent” of the taxpayer. An agent is presumed to be acting in accordance with the will of the person whose property that agent is managing, whereas anything a goverment might do with a taxpayer’s property — even over that taxpayer’s specific protests — is based almost entirely on the decisions of others, their own miniscule vote notewithstanding.

Simply put, anyone you can’t dismiss at will is not acting as your agent.

Jesse September 12, 2007 at 3:23 pm

I was certain the word “government” was in that first sentence when I previewed it. Anyway: “Alex, the government does not behave in any sense as an ‘agent’ of the taxpayer.”

Alex MacMillan September 12, 2007 at 5:26 pm

Jesse: Okay, I won’t argue with your point. Choose not to call the government “agents” if you wish, but my main point is that when the government carries out trades, many such trades do not benefit the taxpayer. Hence, in the present U.S. real world, a great many market transactions do not benefit both buyer and seller.

Consider, also, public corporations. Would you argue that all trades carried on by management agents are designed to benefit shareholders?

Then there are third party adverse effects of market transactions. Giving a person the right to sue for third party harm hardly is not effective when the cost of suing is high relative to the individual harm of the transaction.

How about free market transactions in nuclear weapons? The transactions may benefit both buyers and sellers. But so what? The third party costs are huge, and the right to sue buyers or sellers by third parties affected would be pretty useless.

Other third party effects of market trades that benefit both buyer and seller may adversely affect people of future generations.

In other words, a free-market transaction that is carried out without agents (agents forced upon us or hired agents) and has no affect upon any third party is to be considered a good transaction that benefits all concerned. But there are plenty of market transactions where not all these conditions are fulfilled.

Jean Paul September 12, 2007 at 5:59 pm

Alex, I must disagree.

A trade is a change of ownership; nothing more. Third parties need not (and should not) concern themselves.

If half a second ago I own my A but half a second from now you own it, and if half a second ago you own your B but half a second from now I own it – in other words, if we trade A for B – where is the externality which negatively affects a third party?

The changing of hands of an asset is among the LEAST damaging kinds of activity to third parties. Trade is absolutely internalized.

Negative externalities may follow the trade… but they could as easily precede it as well. The trade itself is neutral. Whether in human organs, nuclear weapons, refined narcotics, or any other scary good.

Alex MacMillan September 12, 2007 at 8:23 pm

Jean Paul: When an executive spends funds for his own purposes rather than to further shareholder interests, this transaction, though benefitting the buyer (the executive) and the seller, does not benefit the person paying for the purchase (the shareholder). Same thing in government when bureaucrats or elected representatives carry out, or cause to be carried out, transactions that do not benefit the taxpayers who finance the bureaucrats and elected officials. The agency problem is well recognized as a situation in which the person who pays for one side of a market transaction carried out by a middleman may not benefit from the trade.

When someone sells a nuclear device to a terrorist organization or sells plans of how to make homemade bombs to unstable individuals, though you regard this trade as “neutral” in some sense, most would not. That is, most people would not separate the probability of bad things happening to innocent people from subsequent actions that a trade facilitates and the trade (change of ownership) itself.

Jean Paul September 12, 2007 at 9:44 pm

Alex: Whether or not most people can overcome their socialist brain damage (note, I do not exempt myself from this! I am a product of the public school system! I am constantly battling a flawed intuition, inflicted by 13+ brain damaging years under state rule!) to treat the matter honestly, it remains a fact that trades are neutral to third parties. I mean, that’s just a fact… there’s no more stark way to say it. Trades are third-party neutral, end of story.

Note that the agency problem does NOT involve any third parties. So third-party neutrality holds even here.

More on bad trades and the agency problem:

First, no one ever said bad trades were not possible. In fact I explicitly noted the possibility. My claim is that over the course of one rational actor’s lifetime of free trades, of which some are beneficial and some are not, the net will inevitably be positive. This is because:
- dishonest parties to trade acquire reputations as such
- likewise dishonest agents acquire reputations as such, and get fired
- agency agreements contain built-in penalty clauses to discourage abuse (if not the actor’s very first, then certainly the first one following their first time being burned)

The above applies to FREE trades, which include those made through voluntary agency agreements.

Coerced trades, such as any trade made by a government official, do NOT qualify.

On the topic of bombs:

The crime is not in the selling of the bomb designs, nor the buying of the bomb designs, nor the buying or selling of the bomb materials, nor the constructing of the bomb, nor the drafting of elaborate plans to detonate the bomb suicide-style in a densely populated area.

A crime is only committed at the last point where an intelligent will sets injurious events irrevocably in motion. Which, in the case of a suicide bombing, is when the madman flips the switch to blow the thing.

It is essential to recognize this, and it is equally essential to ‘punish’ only the fatal act itself.

Alex MacMillan September 13, 2007 at 8:33 am

Jean Paul: First of all I agree that most free market transactions benefit all affected parties, but, as I still believe I pointed out clearly, many do not.

Sure, bad agents get theirs sometimes, but there are at any time many bad agents making adverse transactions for their clients.

I see you do agree that many government transactions are bad.

And, with respect to my example of free trade in nuclear weapons and the expected outcome, you define away the problem associated with such trades by disassociating the expected bad result to follow from many such trades from the trade itself. I think you’re in a tough position if you would argue, for example, that a person with a bomb strapped to their body and walking into a crowded market is absolutely innocent of any criminal act, and should not be constrained from doing as he pleases, until after he detonates himself.

Paul Edwards September 13, 2007 at 12:54 pm


“I’m not sure what point you’re trying to make by quoting Mises here, but surely a “zero payment deficit” is just that and therefore in no way constitutes a “trade deficit” as Robert Murphy defines it.”

It is good that you ask, because the (Rothbard) quote was in response your post that there is no such thing as a trade deficit. I just didn’t have the heart at the moment I posted it to address it directly to anyone. On the other hand, I also didn’t want the statement you made to go unanswered.

“In any case, if the dollars were really dollars — which today they are anything but: http://www.csamerican.com/stuff.asp?k=25 — we’d be talking about a sound-money economy wherein any notion of a “trade deficit” would be nonsensical.”

The nature of our money, fiat or hard, is not relevant to the question of trade deficits. Rothbard’s argument stands under all conditions. The long and short of it is a trade deficit is simply where “imports are greater than exports”. And as Rothbard explains in plain terms, it is “paid for somehow”. I guess I don’t need to re-quote him entirely. In a hard money system these payments would be made in hard money. In a fiat system, they are made in fiat money which for the US is the US dollar, which implies a capital inflow towards the US, and therefore a zero payment deficit.

Alex MacMillan September 13, 2007 at 5:44 pm

A current account deficit is paid for (in a strict accounting sense, but not in an economic sense) simulatneously by a capital account surplus. Suppose Mr. U.S. buys a product from Ms. For., who sells the U.S. $ to Mr. For., who uses the U.S. $ to purchase U.S. government bonds. This kind of thing has been and is, of course, happening a lot lately.

Mr. For. has been attracted to postpone his consumption by the great U.S. interest rates on the T-bonds. But Mr. For. hasn’t given up his consumption indefinitely to Mr. U.S. In the future, Mr. For. will receive interest on the U.S. bonds and ultimately principal repayment in U.S. dollars, which proceeds he will use to buy U.S. exports. At the time the U.S. exports flow to Mr. For., Mr. U.S. is taxed by the government by the amount of these exports. The higher taxes and thus the reduced ability for Mr. U.S. to consume is the price paid for the part of the current account deficits caused by government debt financed spending.

The only way this won’t happen is if Mr. For. is willing to accept ever growing amounts of U.S. government bonds into the indefinite future.

So, if one believes that foreigners are going to always be willing to accept increasing amounts of U.S. government debt year after year, then there is no need to worry about ever having to sacrifice future consumption for the government induced portions of current account deficits. If one believes that foreigners at some point will not be willing to hold ever increasing amounts of U.S. government debt, then there is cause for concern.

Jean Paul September 13, 2007 at 7:00 pm

Alex: “I think you’re in a tough position if you would argue, for example, that a person with a bomb strapped to their body and walking into a crowded market is absolutely innocent of any criminal act, and should not be constrained from doing as he pleases, until after he detonates himself.”

I would absolutely argue they are innocent of a criminal act until they perform one, and walking around at an infintely high – yet contained! – lethal potential is not not a crime. A crime is performed only in the unleashing, or in the willful threat of unleashing, of lethal potential into lethal force. Or even perfectly benign nonlethal force.

In other words, felt externality = crime. Unfelt externality = no crime.

At the same time, I would NEVER argue this person ‘should’ not be constrained. I would argue there is niether a should nor a should-not, but only the rightful will of other property owners, exercised at their pure and utter discretion.

If those property owners choose to bar someone on the basis of X-ray scan, or on the basis of dangerous-person face recognition, or on the basis of skin color (oh my, probably my most controversial statement yet, oh my oh my), or on the basis of “I’m just a jerk today and I say no” – well, that’s the pure right of the property owner. Which will CERTAINLY be exercized to protect that owner’s interests in peace and safety.

What I am doing here is drawing a very clear distinction between a ‘crime’, which merits an in-kind forceful restitution, and ‘behavior deemed unacceptable by property owners’, which merits sanction up to but not exceeding the non-aggressive powers of the owner – powers which any owner may freely and rightfully apply for any reason, however arbitrary.

I guess the point I’m making is – there’s lots of ways to skin a cat. The JUST way to deal with things is to avoid aggression, and the institutions of private property and free association provide more than adequate means to solve most problems free from aggression.

Paul Edwards September 13, 2007 at 7:02 pm

This post is not addressed to anyone in particular.

My view is that criticisms of trade deficits are, to put it a bit bluntly – sorry, i should think of another way to put it – pointless.

The fact is, in pure anarchy, trade deficits between individuals, neighborhoods, towns, cities, counties, countries and continents would occur all the time, and no one would consider them a problem.

The only reason we even think about them in a negative light, is because they are instigated by central banks aggressively tinkering with the supplies of their respective currencies, devaluing and pegging their currencies, changing interest rates, exchange rates, and unnaturally inducing borrowing and consumption or savings or misallocations of savings, and causing huge distortions, and misallocations of capital in all markets across the planet.

If there is a problem with a trade deficit, it is merely one of many symptoms of a more fundamental and concrete problem: central banking and fiat currencies.

If the world were on a gold-coin standard and Americans were dishoarding their gold, and the Chinese were increasing their gold holdings, would we be having a discussion of how wrong it is for Americans to have such a low demand for money, and the Chinese such a high demand? That’s one person’s arbitrary value up against another; what’s the point of that?

Regarding interest rates, is it not true that under an international gold-coin standard, with free markets in the financial sector, that international arbitrage would guarantee uniform interest rates to all, regardless of localized time-preference situations?

So it seems to me sensible to focus on the true and real source of our problems: central banks, and don’t worry so much about second-guessing the world’s time preferences and investment preferences. There’s nothing a priori to be said about them.

Jean Paul September 13, 2007 at 7:03 pm

Alex: “I see you do agree that many government transactions are bad.”

I think they are ALL bad, actually. Every single one.

Jean Paul September 13, 2007 at 7:12 pm


Perhaps it is better not to say that every free trade is guaranteed to yield a net positive outcome for each of its voluntary participants.

Well, actually, no one said that.

But to clarify, rather: every free trade is absolutely EXPECTED by its voluntary participants to yield a net positive outcome for themselves. If the outcome of a free trade was expected to be net negative for one of the participants, they would decline to commit the trade. If an agent was expected to screw you over, you’d not grant them authority to make the trade.

Thus a bad outcome for any of the participants in a free trade is a matter either of mis-predicting, or of fraud. Predicting is part art and part science, and even in the case of a bad trade, the participants have none but themselves to blame.

Fraud is something else entirely, and if not a genuine crime, then certainly a breach of contract subject to restitution.

Alex MacMillan September 14, 2007 at 10:45 am

Jean Paul: “Perhaps it is better not to say that every free trade is guaranteed to yield a net positive outcome for each of its voluntary participants.” You seem as though you’re quoting something I said, but I did not say this. Of course, every free trade is expected to benefit both people invovled in the exchange. And that’s why I, and the rest of us here, think the free market system is so wonderful! But, I don’t think we should oversell the free market and pretend that every free trade benefits all those AFFECTED by the trade, because that is blatantly false, and opens us up to criticism that we are blind to the fact that there are some free market problems. Many free market transactions, though expected to benefit both sides to the transactions, nevertheless hurt other people (and are expected to hurt other people), not party to the actual transactions.

Alex MacMillan September 14, 2007 at 10:57 am

Paul Edwards: Let’s suppose we are on a gold-coin standard. It doesn’t matter. The government spends like mad and issues bonds to finance huge deficits. Many of these bonds are purchased by foreigners. The interest and principal repayment of these bonds to foreigners will still require domestic taxes and therefore consumption sacrifice for the then current generation of taxpayers.

Paul Edwards September 14, 2007 at 11:48 am


“Paul Edwards: Let’s suppose we are on a gold-coin standard. It doesn’t matter. The government spends like mad and issues bonds to finance huge deficits. Many of these bonds are purchased by foreigners. The interest and principal repayment of these bonds to foreigners will still require domestic taxes and therefore consumption sacrifice for the then current generation of taxpayers.”

I agree. So the problems you cite are:

1. There is a government.
2. It taxes.
3. It spends purely on wasteful consumption.
4. It spends more than it taxes.
5. It borrows.
6. People lend it money.
7. Foreigners lend it money.
8. Debt and interest will need to be paid back.
9. Which causes repeat of 2 – 8
10. Future tax-payers must also pay taxes.

Of this, which is the very least significant issue? The least significant issue is who lends the government its money. Furthermore, because foreigners lend it money, more money remains in the hands of American savers – there is less of a crowding out effect for more productive investment at home.

The problem in your scenario is the existence of the state; the problem is not that foreign capital is directed towards the US.

Alex MacMillan September 14, 2007 at 12:18 pm


I agree, the problem is with government. The present current account deficit is but a symptom of this root cause. I suppose in some sense the argument is definitional in nature. Someone is bleeding profusely from the neck. This is a symptom. The cause is a bullet -a big problem. The cause is instead a life-saving operation -no problem. If the present day U.S. current account deficit (symptom) were caused by big U.S. capital investment -no problem. But it is caused, to a large extent by debt financed government spending -big problem.

Jean Paul September 14, 2007 at 12:39 pm

Alex, I wasn’t quoting you, I was addressing a statement to you. Which I then moderated by saying “actually, no one said that.”

Sorry for the confusion. I don’t think we are in disagreement here, just chosing to focus on different truths as being significant.

Jean Paul September 14, 2007 at 1:04 pm

Actually Alex, I guess there IS a point we disagree on.

My position is, it’s unjust to forcibly punish in a ‘preventative’ way. Prevention should be achieved by owners exercising their property rights in free association with others to provide maximum security for their interests. Force is only permissible to restore wrongs that are committed or willfully threatened.

I understand your position to be: it’s ok to forcibly punish in a preventative way.

So that’s where I think we do differ.

The reason I disagree with your position is that prevention does not require force. Property and free association are beyond adequate for prevention. And if you CAN avoid force, then you MUST avoid force.

Jean Paul September 14, 2007 at 1:36 pm

Alex says: “I don’t think we should oversell the free market and pretend that every free trade benefits all those AFFECTED by the trade.”

…I’m trying to narrow in on the disagreement here. It seems maybe your definition of ‘affected’ is different than mine.

Reality is an unbroken continuum of cause and effect, the situation at each infinitesimal moment following from the previous.

The above is a true statement. Do you agree?

If we stop the analysis there, we can conclude that this present instant is the consequence of EVERY instant that preceeded it. Thus the ‘blame’ for this instant can be traced to any and all prior instants, all the way back to the big bang and beyond, if you like. Choose any instant, and it is ‘to blame’ for those that follow.

By this reasoning, we can consider every action to be criminal, because every action sets the stage for the future, and thus sets the stage for all harm occurring therein.

I can’t imagine you agree with this absurd position, so you must have some criteria by which you stop the regression through time, like so: “The crime did not occur yet… go back further… go back further… A Ha, HERE is the instant where the crime occured”.

By the arguments you have presented, you believe that some crimes should be properly regressed back to the point of trade between two parties, and conclude that to prevent the harm, the criminal trade must be prevented.

In the case of the suicide bomber, you choose to ignore the flipping of the switch as the cause of harm. You choose to roll back further into the past to the moment when someone made a free exchange with the bomber – perhaps for chemicals, designs, airline tickets, maybe even food and shelter, who knows.

But the point is, you have some kind of rule that you apply which says “This harm that befell others, when a hyperexpanding cloud of gas tore their bodies apart, was CAUSED when some trade occured. The harm was not caused prior, nor after. The harm was caused at the time of the trade. Thus it was the TRADE that AFFECTED these others. Such trades must be prevented.”

To this I simply must disagree. I maintain that the trade didn’t affect anyone. The actions of the parties following the trade may – MAY – have affected someone, but the TRADE did not.

In fact, by the very nature of free trade – throughout this discussion I am assuming of course a FREE, uncoerced trade – I would say it is impossible for others to be affected. The only parties affected by the TRADE are the parties to the trade.

Paul Edwards September 14, 2007 at 1:44 pm


“I agree, the problem is with government. The present current account deficit is but a symptom of this root cause. I suppose in some sense the argument is definitional in nature. Someone is bleeding profusely from the neck. This is a symptom. The cause is a bullet -a big problem. The cause is instead a life-saving operation -no problem. If the present day U.S. current account deficit (symptom) were caused by big U.S. capital investment -no problem. But it is caused, to a large extent by debt financed government spending -big problem.”

If your bleeding from the neck analogy were applicable to a trade deficit, then the issue of trade deficits is something we can directly and usefully discuss, just as we can discuss the nature of government spending or central banking. However I think it is not. Consider this: Someone is borrowing to expand his manufacturing facilities or borrowing to buy a nice new house, rather than doing something else (who knows just what else he “should” be doing). Can we reason that either of those actions is necessarily wrong, based on the fact that credit is artificially cheap? The answer is no we cannot. He may have done well to proceed regardless of the central banking situation. We can only know a priori that artificially cheap credit will necessarily cause misallocations of capital, and reduced savings, in general.

The proposed “symptom” of any particular business expansion or home buying expedition, is not necessarily a symptom of anything at all, in any particular instance. This can never be known. All we can know is that there is definitely a “problem” necessarily with central bank coordinated credit expansion because it has an overall effect of capital misallocations as well as representing in principle, a fraudulent redistribution of wealth to the banks and their immediate borrowers.

But furthermore, economically speaking, and strictly from the perspective of the American consumer, there is no problem with the Chinese central bank overvaluing the US dollar for the purposes of promoting and subsidizing Chinese exports to the US. It is a subsidy, free and clear to the US consumer. That the Chinese central bank ends up holding so much US financial paper in the bargain just means that we also enjoy lower interest rates than we otherwise would. It is true that the Chinese banks have the power to dump this paper and drive interest rates up, but for them to do so would be at further costs to them as well, and even if they did this, it would present again, a corresponding benefit to whoever bought the paper they were dumping at the discounted prices.

So this trade deficit issue is just not something that we can point to and say “stop it and you’ll be better off”. The ultimate problem is our own central bank and its banking cartel and our state which benefits by it.

Alex MacMillan September 14, 2007 at 2:34 pm

Paul: We agree. The “ultimate problem” (the ultimate source of the present current account deficit) is “our own central bank” and “our state.” A current account deficit by itself is neither good nor bad. It may or may not reflect any problem. As I say, it may reflect a good future outlook if it results from globs of domestic private investment. But with regard to the present current account deficit, it does reflect a problem. And it is the problem that it reflects, not the current account deficit itself, that is something to worry about.

Alex MacMillan September 14, 2007 at 3:06 pm

Jean Paul: Concerning your metaphysical logic:

“Reality is an unbroken continuum of cause and effect, the situation from each infinitesimal moment following from the previous.” This is a fatalistic approach to reality, and I disagree with that belief. I do not believe that a thought or action has been necessarily caused by something that happened an instant ago or many instants ago.

The fact that a person may exist on this earth is highly dependent upon events that went before but is not predetermined by all events that went before. Will A and B decide to have a child, C, or will A simply have a vasectomy? Given all events that have gone before, the outcome of this decision is uncertain. Sometimes whether child C is born is about as random as flipping a coin.

Similarly, will C seek to blow up innocent civilians with a bomb strapped to his body and detonated. If you look at C at age 3, sitting in the sandbox playing with his toys, you have absolutely no evidence that this will happen. You smile and pat C on the head.

It turns out, however, that C, when older, gets jilted by his girlfriend, though if he had chosen another girlfriend he may have married and lived happily ever after (my wife told me to say that). However, C, becomes embittered by being rejected and turns to a weird religion that believes it is a duty to go around blowing up non-believers. One day to get to heaven, C straps explosives to his body and walks into a crowed outdoor marketplace. At this point, to any observer, the probability that many people might get hurt by C becomes high (as anyone could infer from the evidence in front of their eyes). At this point, if you had the ability to prevent the carnage I would hope philosophy wouldn’t get in your way.

Jean Paul September 14, 2007 at 3:56 pm

“I do not believe that a thought or action has been necessarily caused by something that happened an instant ago or many instants ago.”

WONDERFUL! So you concede that there is always the possibility the insane terrorist will have a change of heart a moment before flipping the switch – perhaps the warm smile of an innocent child softens the scars of socialist torment and breaks through to his core humanity – and he will quietly withdraw in shame for his anger, seeking a life of repentance, but also rejoicing that by the true grace of whatever god he follows, the veil of hate was lifted from his eyes, and violence and evil did not consume him in the end.

Anyway, I still haven’t seen you defend how any of the trades this madman made – THE TRADES THEMSELVES! – are to blame for his evil actions, since by your own admission, and rejection of fatalism, there is no deterministic chain running unbroken from the point of trade to the point of a hyperexpanding gas cloud ripping the marketgoers to shreds.

Also, I’ve hinted a half dozen times already how the market might non-aggressively turn a blind eye to the trade yet decisively prevent the bombing, but you don’t seem to want to run with it, so let me speculate on one possibility among an infinite number:

In the insane world of aggression and coercion where madmen run wild, prudent property owners, realizing violent madmen are not just a product of government aggression but just a natural fact of life that must inform every discussion of justice, have protected their interests to the full extent of their nonviolent means. The gates to the market are fortified airlocks where people pass one at a time and a sophisticated full-body scan is performed for weapons (Good enough for the airport, good enough for the market, right?) The high possibility of a imminent suicide bombing is ascertained when the bomber idiotically enters airlock 42, and a nonlethal neurotoxin introduced into the air to incapacitate the aggressor. Anticipating this possibility, the bomber had set the bomb to detonate on a dead man’s switch. The bomb goes off, scorching the concrete in the fortified airlock. No one is hurt because with all the money saved on not interfering with free trade, and with the ever-present risk of suicide bombings at the forefront of everyone’s minds, fortification technology is really awesome at this point. The remains of the madman are summarily hosed off the walls of airlock 42, and an out-of-order sign is placed on the door until it can be repainted. The market carries on uniterrupted.

That’s just one speculated answer to your posed scenario. The market will probably choose a different one, given the technology available.

The point is, you need to find a way to stop the explosion only, and your toolkit is your property. That means no meddling in free trade.

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