The Myths of Trade Deficits.

On the global scale, there appears to be a great fear of trade deficits. Even in the standard economics notes given out to us, we are told that a persistant balance of payments deficit is no good.

Like so many economists that champion the laissez-faire market, we will attempt to slay the myths that cloud the trade deficit. First of all, lets address the problem of a trade imbalance. People always think exports good, imports bad. Not necessarily. For trade(in the traditional sense) to even occur, clearly, you must place value on foreign goods. And the foreigners must place value of your goods. The statisfaction that both of you gain from trading as a result, must therefore be greater than the satisfaction derived if both of you had not done any trading. Or else, why trade. Well, we can now insert an accounting medium between, and see that the result does not change. I value a certain foreign good, and is willing to exchange my currency for that good. The issue then, is on the production and consumption of goods. We derive satisfaction from it. Money is just a intermediary for greater convenience. We could just as easily use Maplestory's Mesos as a global currency. If you are importing more than you are exporting, or if you are buying more than you are selling, than you must be borrowing money somewhere. For a normal man-on-the-street, you can go to the bank to borrow money. You can use some of the borrowed money to produce something, or invest in production, or you can use the borrowed money on just consumption. If you borrow money and use some of it on consumption, and the rest of investment, then you are ok in the future. Because you can have the ability to pay back the bank. Same thing for a country. A country like USA that runs a trade deficit, must be borrowing money to finance this deficit. For a country, USA doesnt turn to banks, USA can sell pieces of paper, or sell capital stock. The pieces of paper are basically an IOU, with the condition of an interest rate.

Trade deficits are in no way an economic malaise. Therefore those people who try to use protectionist measures to limit imports are akin to trying to the government who says to its people, dont consume so much, produce more! Like the miser in the fairy tales that accumulate gold that he cannot eat, what is the point of accumulating a surplus of money as reserves if you are not going to spend it? The whole point about economic growth after all, is so that citizens can enjoy a higher standards of living and consume what they want. Now, if citizens are constantly living beyond their means, that is, borrowing just to fuel consumption, than that is a problem. In this case the government will have to do something to tell the citizens not to borrow so much money. It can reduce the availability of credit in the economy. But overdoing the monetary policy can result in many businesses going bankrupt. Perhaps reducing the credit card lines to the consumers. Or going to the supply-side and push out the aggregate supply. That people do not really want American goods must mean American goods are losing their competitiveness. Then Americans must really upgrade themselves. But definitely we do not try to reduce consumption of imports or even consumption, because that would only be curing the symptoms but not the root of the problem.