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Today, we will look at Savings and Investment in the United States, which is directly reflected in the Balance of Payments. Economic Nationalism series You can think of the Balance of Payments as the difference of Exports of Goods and Services, and Imports of Goods and Services, with the difference balanced (trade is always balanced) by the financial account. Or, you can think of the Balance of Payments as the difference of Acquisition of Foreign Assets by US entities, and the Acquisition of US Assets, by foreign entities. (A loan here is the “acquisition” of a debt asset.) The balance is made up by Goods and Services account, or Current Account (which also includes overseas income). Both of these views are fundamentally correct. When you decide to buy something, you also decide not to save the money you are spending; and when you decide to save and invest, you are also deciding not to spend the money on consumption. At the aggregate level, a combination of billions of such decisions among millions of individual entities, you have the aggregate Balance of Payments. When you think of it this way, it is easy to see that, if the US savings rate was high, then there would be a tendency to purchase overseas assets (because you have to acquire something, that is the definition of financial savings), and also, a tendency to purchase domestic assets, which means less of them would be purchased by foreigners. The result is a Current Account Surplus. When looking at domestic Savings, there are some big factors that we should consider. The basic idea of Savings, especially financial savings, from an economic perspective is that it is the flip side of investment, which means the creation of some new productive capacity. If we do not spend this

We’ve been talking about elements of Economic Nationalism. Economic Nationalism series The basic character of the debates about Economic Nationalism, over the decades, has been pretty bad reasoning by the Economic Nationalists, who are nevertheless responding to real and important issues; and a tendency to recite “general economic principles” among the non-Nationalists, mostly in calculated ignorance of real-world situations. Foreign trade is always a big component of these debates, so we have been addressing various issues related to foreign trade; not only in goods and services, but also, on the other side of the Balance of Payments, which must always balance (trade is always balanced), finance and investment. For the sake of argument and convenience, economists typically talk about the “Rest of the World.” But, we do not actually interact with this “Rest of the World.” We only interact with individual entities. We must remind ourselves again that also we do not interact with “China” or “Mexico.” We only interact with individual entities characterized as “Chinese” or “Mexican,” which may include a subsidiary of Ford in Mexico, or Alibaba. Of course this “we” itself is not the “United States,” or “Americans,” but literally you or me, or some other entity like a corporation. The “United States” does not trade with “China,” but I might buy something on AliExpress this afternoon. This interaction of individual entities is the reality of trade. Everything else is abstraction and aggregates. To understand trade, we must thus begin with understanding the trade we are familiar with between individuals, or individual entities like a corporation or government entity. We say that we “trade” our labor Monday through Friday at a job for some money; and then we “trade” this money for things we buy from the “Rest of the World,” such as WalMart. We might spend

Now I think we have a pretty good mental picture of what the “Balance of Payments” really is; and its components the Current Account, Capital Account and Financial Account. Economic Nationalism series Today we will contrast with what you often hear from other economists. It is complete gobbledygook. Here’s Wikipedia, always a good summary of conventional wisdom: Wikipedia on the Balance of Payments What is this? It is nonsense. You should be able to see that clearly now. When I see this nonsense, I think that it must arise from two sources: Error and Stupidity. Most economists, I have decided, are not very smart. They are smart enough to be taught something like you read above — in fact quite abstract — and recite it on demand at appropriate times. They are smarter than the population average. But, they are not smart enough to see that it is nonsense. The smart people went into engineering and computer science, or private equity. For one thing, the tendency of universities toward internal dogma naturally ejects the kind of smart young person who can see that this is nonsense. Such a smart young person becomes an immediate threat to the older professors who have based their careers on the propagation of dogmatic error. The fact of the matter is, the older professors can’t even understand the smart young person’s correct observations. Pretty soon this smart young person, becoming aware that the economics department is in fact composed of people less smart than they are, and that their natural mental superiority is an organizational liability, gets a job at Bain Capital. The Structure of Scientific Revolutions, by Thomas Kuhn The Curse of the High IQ, by Aaron Clarey Intentional Obfuscation. I think that a number of these issues have been intentionally obfuscated, to put

Unfortunately, legitimate issues regarding foreign trade often become mixed up with talk about the “current account deficit,” which is mostly fallacious and erroneous, and which has served as a do-anything catchall over the decades (actually centuries) for whatever it is that you want to do. Trade is always balanced. There is no “trade imbalance.” Never has been, never will be. “Unbalanced trade” is a gift — which is also perfectly fine, and bigger than you might think, in the form of official foreign aid and also overseas remittances. But these gifts too are “balanced” in the sense that there is no particular problem with it, or some residual issue that needs to be resolved in the future. However, as is the case with many economic statistics, the Balance of Payments may reflect some other problem. This other problem’s effects show up in the Balance of Payments. To understand what the Balance of Payments actually is, let’s imagine an individual. This individual (or family) is engaged in “trade” with the “rest of the world,” i.e, the economy. We will imagine that this individual primarily “exports” employment labor, for which they are paid. Then, the individual “imports” whatever they spend their money on, at Walmart or Amazon for example. Even in this case, there is quite a bit of a “domestic economy,” or productive activity within the household. This might include making dinner, raking leaves and cleaning the toilet. So, there is both “domestic” and “foreign” trade in our example. Let’s say that this individual runs a “current account surplus.” They receive money from their employer, but they do not spend all of it on current consumption. There is something left over. This is “savings.” This “savings,” from the start, takes the form of some kind of financial asset. It might be

In the past, “Economic Nationalism” sometimes had a monetary component. Basically, this was a currency devaluation. “Easy money” and devaluation has been part of the Keynesian macro-manipulator handbook since the Ancient era, and more recently, since the Great Depression significantly undermined the Stable Money consensus of the 19th century. In the 1930s, devaluations were undertaken basically to “relieve debtors,” and also, reduce effective wages through the devaluation of the currency in which wages are paid. This would presumably allow greater employment. Also, exporters would get a direct advantage. Domestic industries would get an effective advantage since, from their perspectives, products from foreign competitors would become “more expensive” in terms of the devalued currency. October 2, 2016: The Interwar Period, 1914-1944 (contains extensive forex information) “You can’t devalue yourself to prosperity” has been a timeless adage in economics. It makes sense that you don’t make people wealthier by devaluing their wages. But, during a time of recession or crisis, it has been a stopgap that governments have grasped for over and over again, over the centuries. These effects seem to provide an “advantage” to the “nation” (illusory of course), while also creating an artificial “disadvantage” to the rest of the world, who has to deal with artificial competitive issues, plus huge losses on investments in the devalued currency. “Relieving debt loads” just means a partial default to creditors, and this is particularly apparent to foreign creditors, who take immediate losses on their devalued assets. People today don’t sense what a catastrophe the devaluations of Britain (and many others) in 1931, and the US in 1933, were to the rest of the world. The Rest of the World (which included the US in 1931), took mammoth losses on what was then considered the “risk free asset,” British and US government bonds. This

We were listing some good reasons for significant tariffs. September 22, 2024: Good Reasons for Tariffs Mostly, this was on the topic of a certain amount of Economic Independence, often agricultural, but for the US perhaps chip manufacturing is at the top of the list today. Also, we discussed the difference between moving an auto factory from Detroit to Georgia, and moving it from Detroit to Mexico. Today, we will talk about the fact that we live in an environment of floating fiat currencies, where “unfair advantages” and “unfair disadvantages” can easily come about due to foreign exchange swings. On January 1, 1994, the North American Free Trade Agreement came into effect, dramatically liberalizing trade between the US and Mexico. Wikipedia on NAFTA. In the 1980s, Mexico had hyperinflation. Like other Latin American countries, this settled down in the early 1990s, and in 1993 Mexico had what appeared to be a reliable dollar peg, at 3.1 pesos per dollar. NAFTA was signed. In the middle of 1994, this peg broke and the peso began to slide lower. At the end of 1994, there was a collapse, which ended up taking the peso to about 7.5/dollar in 1996. What a coincidence! Many think it was not such a coincidence, but planned. Many US businesses were demolished by the combination of free trade with low-labor-cost Mexico, and also, the unexpected devaluation of the peso (and, in effect, Mexican wages). In the 1992 election, in opposition to NAFTA, independent candidate Ross Perot called this the “giant sucking sound” of capital moving to Mexico to take advantage of low-cost labor. So imagine the sucking when the peso’s value was cut in half. This was, I think, a major episode in the long deindustrialization of America, and the decline of the lower middle class. The