6.1 Unsustainability of trade deficits

Sounds like farfetched?  

Why should country A be working and let country B consume?  Why should country A through its banks permanently finance consumption in country B?  How could this model be functioning long term when it is evident that country B without industry and wages has no chance to repay its loans which it is using to buy imports from A?  How are the banks in A going to accept that B is repaying its loans only through another loans and its indebtedness is ever growing?

 These are all correct questions and there are no logical answers for them why it should work. This simplified model is leaving nobody at doubts that such trade is most dubious and unsustainable.

But it is happening!!!            And it is happening as you are reading this book.

  • Country A is China, country B is USA.

USA since 80ies has opened its markets to Chinese goods and now the China is exporting billions of USD. As a consequence the whole industries of USA were ruined and millions of jobs were lost. At the beginning it looked as a profit, preferences which lead American consumers to choose Chinese goods were obviously the price. However, as unemployment was rising, so was the indebtedness (which was partially covering the potential of even higher unemployment and huge losses).  China was also the lender. And it is still lending. If it stopped, the huge deficit of USA would be unable to refinance and the whole system would collapse.

There would be huge increase in unemployment in China, fall in profits of production businesses exporting to USA as well as fall of Chinese banks. Their loans are already not repayable, they are just being revolved. If the circle was to stop, it would be obvious that USA is not able to repay this debt and they would follow the path of Greece (without straightforwardly printing the money to cover the debt, as USA has that option. What kind of effect it would have on the value of its currency and inflation however remains a question)

  • In Europe countries A are Germany, Netherlands, Belgium – European exporters (the North) and countries B are Greece, Italy, Spain, Portugal and France (the main EU importers). The problem here is the same.  A is exporting to B, which have no money to pay with, their domestic industry is falling due to these excessive imports and their finances are maintained only through mega loans provided by countries A.

So economic model, which is unstable and unsustainable is in fact widely used and its failures are visible on everyday problems which are getting bigger and bigger. The huge imbalances are just inflating to ever bigger proportions, lack of real missing power is being replaced just with loans which are revolving to eternity (?).

 Politicians established this system on behalf of their industrial groups which were already not able to achieve profits in their domestic economies.

But this system will not last forever as growth on debt is only temporary and backward cycle of recession erases all already achieved profits. It seems that industry somehow got the message and so it is trying to make profits abroad. But these external profits are not sustainable either and will collapse because of the basic problem which is fall in buying power as a result of achieving profit as such. Every unspent profit is destroying buying power and if it is not substituted by transfers coming from state, it gradually diminishes until it falls to a level where the whole system comes to downward spiral of recession.

Expectations, that trade balances will level over time and state budget deficits will decline and so the unemployment and financial problems will be solved are vain. The only situation when this could have been achieved would be with zero profit at global scale. And this zero profit in international trade could become positive again only through loans and transfers. However, this is a thing which the industry is not able to recognize, or the equilibrium seems too distant in time to matter.
And the time bombs are ticking.

This brings whole new serious dangers to play:

  • If in domestic economy certain number of businesses and banks goes bust, it is an internal problem of that economy. Foreign countries bear no loss and it is none of their business. However, if country of type B declares bankruptcy it can lead to serious consequences. There are much bigger sums of money at play and subsequent threat of banks going bust in partner country as well as an substantial increase in unemployment stemming from fall of whole sectors of industries, which lost their foreign markets can lead to international incidents in the forms of wars ( Give us back our money !!!, It is your fault !!!   can have devastating consequences)
  • If the growth is achieved through monetary stimulus in domestic economy, excessive money printing can cause inflation in this country. However, if international trade is being financed through printing press, countries of type A can have serious objections that their savings are being devalued and the consequences could be similar.

So the globalization brings additional risks as model of unsustainable profit making will come to an dead end eventually in one of its forms and participating nations  could see it as result of unfair approach of counterparty and ask for damages of revenge for lost time and resources invested in production (which ended unpaid) through war conflicts.

But in reality it is nobody’s fault and it never will be anybody’s fault. The profit is not achievable long term nor through international trade, neither in local economy.  Globalization just postpones the inevitable and adds additional clouding of matters in the way of accusing somebody else. The principle: your shirt is closer then coat works well and to steal from “those” foreigners is always considered somehow more acceptable then to steal from your own people. But the parties are not aware that the global outcome will still be the same. It may last longer, but the end crush will hurt even more. (If you are banging your own head against the wall, you can be sure that it is not going to hurt as much as if your enemy would be doing you the service)