Fixing “global imbalances” in three easy steps

Some problems are hard.

Some problems are not, except when we blind ourselves to pretty obvious solutions. Addressing “global financial imbalances”, or, more specifically, the fact that some countries are running persistent current account deficits that they (correctly) perceive not to be in their interest, falls into the second class of problems. It is flawed ideology, nothing more, that makes this problem seem difficult. If you want something to stop, stop it. Let me break it down for you into three easy steps.

  1. Stop blaming China!

    Yes, China’s success at limiting its currency’s real appreciation against the dollar amounts to a combination export subsidy / import tariff, turbocharging China’s tradables sector by making Chinese goods cheap abroad and foreign goods costly to Chinese consumers. The policy has, in some formal sense, robbed Chinese consumers of purchasing power, and shared the loot between Chinese elites and Western consumers.

    But it has also been profoundly good development policy. (See Dani Rodrik.) China’s rise has been miraculous, something that the planet as a whole, and Americans in particular, ought to celebrate. Literally hundreds of millions of people have transitioned from poverty to comfortable modernity. China’s abrupt rise most resembles that of the United States, which went from a civil-war-riven backwater to a dominant world power in only eighty years time.

    I don’t mean to gloss China’s problems or excuse its sins. China’s rise presents huge environmental challenges, to its own people and to the world. I dislike many aspects of its political system. Economically, I’m pretty sympathetic to Tyler Cowen’s China skepticism, and expect that during the continuing economic crisis, a parade of Brobdingnagian boondoggles will come to be revealed.

    Despite all that, in any nondystopian future, China’s gains will be consolidated, not reversed. We should all be rooting for its success. During whatever turbulence lies ahead, we should do everything we can to help.

    I agree with many critics that the combination of China’s currency peg and America’s economic dogma has been harmful to the US. But it is an odd sort of petulance to blame China for acting in its national interest because of consequences that US policymakers have always had the power to prevent. The blame for America’s (very serious) predicament rests squarely with a policy establishment that remained willfully blind to obvious problems for years, and that still refuses to consider effective remedies.

  2. Recognize that a nation’s balance of payments is a legitimate object of public policy.

    Yes, you can write models in which no agent transacts except when doing so is in her infinite-horizon self-interest, in which case policy that restricts or discourages any trade is Pareto destructive, QED. But those models bear little resemblance to the real world.

    In reality, financial flows — trades of promises rather than current goods or services — are subject to unusual uncertainty, and individuals have great difficulty distinguishing advantageous from disadvantageous exchanges. Aggregate financial flows affect both real and financial economies in ways no competent government can afford to ignore. There are reasons why a country might prefer to run a current account surplus or deficit for a while, but that ought to be a considered policy choice. It is rarely sensible for a large, mature, and diverse economy, like that of the United States (or Germany), to run either a deficit or surplus. Persistent trade deficits are a problem for human aggregations of any scale, from family to city to nation-state and beyond. Surpluses are okay at small scales, but become dangerous as they grow. Some groups have reason to oscillate between deficit and surplus, but no sustainable arrangement involves capital flows that never reverse, and whose reversion is not planned for in advance. (This is slightly overstated: a growing economy can sustain persistent small flows indefinitely and maintain a stable net financial position with the rest of the world. For a growing economy, “balance” is a modest range surrounding zero, not a single point. You can also write models — I just did — under which capital flows would never reverse, but the assumptions you need to make are, to say the least, dangerously unreliable.)

    I know of very many arguments that try to justify persistent imbalance, especially persistent deficits. After all, the United States has run very large current account deficits, but its net international position has been relatively stable, because foreigners’ return on their US investments has been abysmal compared to Americans’ return on their gross foreign investment. Also, when a country like the United States, whose debts are incurred in its own currency, runs a trade deficit, it exchanges claims on tokens it can produce indefinitely at zero cost for real goods and services. Why shouldn’t it take the deal?

    These arguments are both ways of saying that some countries, either intentionally or inadvertently, are willing to offer other countries real subsidies mediated and often hidden by complex financial arrangements. But perpetual subsidy is often harmful to the recipient, even if it is willingly offered by the donor. And usually the subsidy is not explicit, so that the donor retains a claim that it expects (however implausibly) to be payable in future goods and services. Arrangements that rely upon systematically reneging on that promise, by perpetually offering poor real returns on creditors,cannot endure, and are likely to be harmful to the spirit of trust and cooperation upon which trade ultimately depends. All financial claims are mere paper, or “spreadsheet entries”. But our ability to sustain economic arrangements that extend over time and geography depend upon our continually giving meaning to that paper by backing our accounts with sweat and treasure. To the degree that we are unable to do so, to the degree that we issue claims that we find ourselves incapable or unwilling to back, we corrode the scaffolding upon which cooperative prosperity depends.

    To be clear, this does not mean that issuers of financial claims should be bound, come what may, to deliver on those claims. Promises, including bad promises, are always joint projects of a promisor and promisee. There may be times and places where the burden of trying to make good on bad paper exceeds the costs, particular and general, of reneging. We are living through those times in very many places, and we are witnessing the consequences — a corrosion of trust, a diminishment of enterprise. The point here is to recognize that promises are fragile but essential. An environment in which promises made are generally kept, in letter and in spirit and without duress, is crucial to organizing the vast collaborations without which we are naked and cold. Persistent net capital flows imply some group of people accepting a flow of current goods and services in exchange for ever more expansive promises to reciprocate at some time in the future. That may occasionally be justifiable, but it is always dangerous, and ought to be subject to very careful scrutiny. When bad promises are made and broken, the consequences are rarely limited to the foolish transactors. The “externalities” can be severe.

  3. Gradually impose nondiscriminatory capital controls to regulate ones own balance of payments

    Fundamentally, there are two ways a country can regulate its international balance. It can target the “current account” or the “capital account”. Managing one takes care of the other as a matter of course. The current account is dominated by the trade balance — the gap, if any between the value of a nation’s imports and exports. The capital account is equal and opposite: if a nation has imported more than it has exported, it has “paid for” the difference with promises. To accept a promise in exchange for present value is to supply capital. Simplifying a bit, a nation receives capital to the degree that it accepts imports in excess of exports, and offers financial claims to cover the difference. A current account deficit implies a capital account surplus, which sounds nice but is nothing more than a windfall of promises yet to keep.

    Traditional protectionism — trade restrictions like tariffs and duties — target the current account. They alter the price of foreign goods and services relative to domestic goods and services, usually making foreign goods more expensive in order to encourage domestic consumption. However, these policies have a deservedly bad reputation. Attaching duties to imported goods and services implies that choices have to be made about how large the duties should be, and to which goods and services they should attach. That discretion generally proves very attractive to politicians, who may reward political supporters with protection of specific industries, skewing consumer choices far beyond the small home bias that might be necessary to manage the balance of payments. In theory, countries might adapt small, perfectly uniform tariffs. But in practice, this never happens, both because the political temptation to pick winners is impossible to overcome, and definitional questions of what ought and ought not be viewed as imports become fraught. (If I buy advertising on a foreign website, is a duty owed?)

    A much better approach is “capital account protectionism”. Rather than getting into the messy business of interfering with the trade in goods and services, manage capital flows directly. The simplest way to do this is to tax (or subsidize) the purchase of domestic financial assets other than zero-interest cash by nonresidents. There need be no interference in Ricardian free trade, the exchange of present goods and services. But the cross-border trade in promises would be taxed and regulated.

    I can already hear the cacophony of objections, and many of them are valid. Yes, clever people would quickly find ways to circumvent a financial asset tax, especially if implemented unilaterally by a single government. (Mutual enforcement would be preferable, but not essential.) Off-balance-sheet arrangements, clever swaps, would have to be controlled (but we have a lot of good reasons to want to do that). Transactions that multinationals now consider “internal” would become more costly and subject to scrutiny (but again, there are lots of reasons to think that supervising “internal” but international corporate flows might be a good idea, given how often these flows are tax motivated). A good regulatory regime combines tactical flexibility with clear goals to which regulators will be held accountable, creating incentives for regulatory innovation to counter circumvention. Those who think capital controls are always futile and doomed to failure are simply wrong. Sometimes they fail, and sometimes they work very well. That capital controls inevitably “leak” is besides the point. Evading controls entails costs and risks that discourage flows at the margin. The point is never to stop flows, but to modulate them. Capital controls that are intended to maintain balanced accounts are more likely to succeed than controls intended to sustain or enlarge imbalances. Also, in a world where disruptive financial flows are increasingly due to the official sector, capital controls are less likely to be actively evaded. A private speculator might hide capital flows in overpayments for current goods (and bear a huge risk of whether her partner will honor her legally unenforceable claim). A foreign government would hesitate to play such games for fear of provoking conflict with the government whose laws it would be flouting.

    Speaking personally, I don’t “like” the idea of capital controls any more than I like trade protectionism. I enjoy the freedom to think globally and invest wherever I choose. But the experience of the developing world for half a century and of the developed world over the last decade ought to have convinced all but the most ideological observers that balance of payment matters; that we cannot expect balance to naturally emerge in global markets; and that relying only on self-correction means tolerating massive-scale waste of real resources while flows persist, then indiscriminate destruction and human misery when flows reverse, or when the poor quality of earlier investment decisions becomes revealed. Our choices are to simply accept these costs as the price of freedom, to use the tools of trade protection, or to add a layer of regulation to the financial economy. In a world of bad alternatives, normalizing capital controls is by far the least awful. Capital controls aren’t perfect, but they are much more resistant to corrupt micromanagement than trade controls.

    The process of going from liberal to more managed capital flows won’t be easy, but it needn’t be that hard either. First and foremost, it can be done without sparking trade wars. If a country imposes capital controls to manage its own balance of payments, it needn’t discriminate against any particular foreign power. China (its government or private investors) could continue to buy US Treasuries on precisely the same terms as European investors. The market would determine which flows (of both goods and capital, they are inextricably linked) would continue and which would be blunted based on demand and comparative advantage. In public relations and in fact, managing ones balance of payments wouldn’t be “about” or any particular trade partner, but simply a matter of national prudence. In order to minimize disruption to other economies, a nation could announce a several year timetable over which it would gradually increase controls as necessary to bring its accounts into balance. Rather than the heated rhetoric of trade protection (which usually involves somebody accusing somebody else of cheating or dumping or poisoning), capital account protectors can focus on the hazards of their own financial position, and adopt an apologetic rather than accusatory tone to help trade partners to save face as they find ways to accommodate the adjustment.


23 Responses to “Fixing “global imbalances” in three easy steps”

  1. Taxing foreign investment in U.S. real estate is a great idea. Could there be a better way to correct the imbalance created by certain currency pegs?

  2. vimothy writes:

    Following on from last thread…

    Doh. I see it now: investment is simultaneously spending and saving for no change to net wealth but positive contribution to AD and total income. Stupid morlock!

    This is consistent with model output but reflects poor integration of I component in toy. Para of t. still holds. Steve, G is still necessary (see last few comments in previous thread). May be back if I ever have any more “insights”. Thanks.

  3. moldbug writes:

    There’s a straightforward way to manage a trade balance in a goods-neutral way, without micromanaging tariffs: import-export certificates. Contra to Wikipedia, these were not invented by Warren Buffett. Hjalmar Schacht, I believe, was a big fan. The economic successes of the early Third Reich were largely a result of using devices of this type to redirect aggregate demand away from imports and back to German industries.

    Since we’re waxing Teutonic, you’d probably also enjoy Friedrich List’s discussion of the difference between political and cosmopolitical economy. The way to do political, rather than cosmopolitical, economy is straightforward: consolidate the national balance sheet, treating the entire nation as a single corporation. Current-account deficits then appear as losses. The notorious decay of nations which run a chronic trade deficit appears as a parallel with the notorious decay of corporations which run at a chronic loss.

    Similarly, the old mercantilist strategy of accumulating precious metals – much mocked by Adam Smith – appears as no more than the accumulation of retained earnings by a profitable polity. China is a profitable polity in this sense. The US is an unprofitable polity. And you can feel it, can’t you? This accounting tracks our historical sense of national rise or decline almost perfectly – I cannot think of a single conflict. Spain, of course, was also famously undone by trade deficits.

  4. Steve Randy Waldman writes:

    Michael — Real estate is an interesting hybrid between present goods and services and financial assets that imply a promise of future goods and services. On the one hand, the land is just “there”, and once it is sold, no further promises are made. On the other hand, nations are places, land and housing delivers a perpetuity of benefits, so real estate sold extracts continuing costs relative to a baseline that presumes all property to be domestically owned. It’s pretty clear that cross-border property ownership frequently contributes to small country real estate bubbles, though I’m not sure how compelling that case is for the US. I’m more comfortable with controlling financial transactions than real estate transactions, at a gut level. (Perhaps because the purpose of the financial sector is to regulate capital allocation, the financial sector “feels” like the right place to manage capital flows.) But if making financial asset flows more expensive shunted capital flows into real estate, I’d certainly favor taxing those flows as well to promote balance.

    vimothy — I think it’s important to remember that sectors are something that we impose on economies, both when we model them to reason about them, and in our accounting when we act within them. For example, I think the accounting distinction between the business and household sector is much more important for understanding aggregate economic behavior than the distinction between public and private sectors, but Y = C + I + G + NX doesn’t subdivide the private sector (or distinguish between govt investment and current expense). An accounting identity is always tautologically true, but it is still an imposition of an arbitrary view on the world. We might write Y = HC + HI + BI + GC + GI + NX, and find that more informative, or not. It is just as “true” as the standard identity.

    So do we need to split C & I? No. For some purposes, it is useful to just talk about aggregate expenditure, and the stream of present and future benefits it yields. Do we need a G in our models? No, and we can develop interesting models and conjectures without G (and find that private agents save, even without a government to create a net stock of privately help financial assets). But for most purposes, we probably do want to think about how government action affects economic activity, because in the real world it seems to do so quite profoundly, and we’d like to understand its role. So, usually we want some kind of G.

    Mencius — I’m a long-time fan of the “import-export certificate” idea, though I didn’t know it predates Buffet. See e.g. here. But I prefer capital controls to an import/export certificate regime because I think it’s best to minimize frictions from control and regulation in goods producing industries and shift those frictions to the good offices of the financial industry, which pays itself extravagantly to manage them. In particular, I’d prefer to avoid the extra accounting burden and enforcement risk that “real economy” exporters and importers would face under a certificate regime. A capital control regime could enforce balance in a manner completely transparent to (and mysteriously hidden from) real economy importers and exporters. They face no extra burden; they are simply confronted by slightly different prices and alter their behavior accordingly. Unless that proves unworkable (e.g. if we are simply unable to impose a sufficiently effective deterrent of anti-balancing flows), I’d prefer to leave our shoemakers in peace and bug the bankers.

    Re the analogy between a current account deficit and a corporate loss, I’d say I’m with you very often in practice, but we should be careful of the theory. If we consider the consolidated accounts of a nation (which is, after all, precisely what standard balance of payments account does — this isn’t some radical experiment in seasteading), then a current account deficit translated to an increase in the liability side of the balance sheet, usually in exchange for some present flow of goods or services. It translates to a loss only if the present flow of goods or services is wasted or consumed. If the capital flows are used to purchase capital goods — if we import factory machinery rather than lawn furniture — the increase in national assets matches the increase in debt or equity. We’ve altered the national capital structure, but sustained no loss. If we can employ the assets we purchase very productively, so that the value of their future yield is more than the present value of the debt we’ve incurred, running a current account deficit can be profitable. That’s one reason why small economies really might want to sometimes run deficits: borrowing a nice power plant from Germany can enable an increase of production to a nonelectrified backwater that more than covers the debt. But usually, especially for the US, this line of reasoning is used to justify debt-financed consumption, so in practice I think you’re more often than not right to view deficits as losses.

    Re gold-accumulating mercantilism, that’s a big topic. It is often true that the process of production itself creates capacity. (That’s not true for natural resource extractive industries, but it is usually true.) So, paradoxically, economies that export real stuff for gold or even for paper develop capacity and grow, and those that get real stuff for useless tokens stagnate. But running a surplus can only go so far: the illusion that motivates the flow exhausts itself. In a fiat world, that happens when China realizes is debt is valuable only to the degree that it doesn’t actually true to realize any value from it. In a gold world, the same thing happens: the mercantilist has a great deal of gold, but that gold loses its value in real terms as a medium of foreign exchange, because potential trade partners produce nothing of value to you. Large surpluses are always lossmaking in terms of the real exchange value of the accumulated token (although with gold, the token at least does not decay, so eventually after you have let your ex-trade-partners alone, they may have something to offer for a currency you can still use). The loss of real value implied by large surpluses may be offset by the value of increased domestic development, or by strategic advantages conferred by your trade partner’s decay. If gold is your accumulation currency, your trade partner is the rest-of-world, rather than one dying economy, so the surplus accumulation can go on for longer before your gold becomes near worthless. But there is still a self-defeating dynamic there.

  5. Steve Randy Waldman writes:

    Mencius — it’s worth emphasizing that the “profit” accruing to a surplus nation, at least one accumulating its trade partner’s fiat, tends to be accounting profit but not real profit, since the “asset” it accumulates comes to be of ever more questionable value. The real profit that “you can feel” has to do with capacity development, which is distinct from the balance sheet profits a surplus nation might book (and generally not formally included in national accounts).

  6. vimothy writes:

    ”…An accounting identity is always tautologically true, but it is still an imposition of an arbitrary view on the world….”


    It must be the case that I am failing to explain myself properly. Let me give this another go from a different angle. On the other hand, I am on much surer ground discussing symbols qua symbols than symbols qua economic affects, so I may be able to add some value here.

    Your theme (continued from previous thread) about the triviality or arbitrariness of the accounting identities perhaps can enable us to close the gap. As Humpty Dumpty once explained, “When I use a word, it means just what I choose it to mean, neither more nor less.” Of course, by extension, this identity statement could itself be accused of triviality. Within the confines of an abstract symbolic system, any definitional identity just takes you round in a circle back and right to the start. Of course. In girum imus nocte et consumimur igni. There is no end to this regression: like Leibniz’s monads it goes on and on all the way down. So we are stuck in the “separate world beside the other world”—a black iron prison of inescapable tautologies. Is that an insight—can something be both profound and trivial at the same time? I don’t know. Deconstructionism is mildly diverting, but mostly rather redundant.

    For example, Dani Rodrik is always very careful to avoid eliding the distinction between the aggregate benefits of the current phase of globalisation and its individually distributed effects. On aggregate we are better off—another identity. But is it profound or trivial, arbitrary or apposite? Perhaps it is hard to say. But it is clear that, whatever the case, it is probably of little comfort to those whose individual losses constitute a share of the wider gain to think that, “on the whole we are richer and the world is a better place.” And look at what has happened: we have just found the limits of the black iron prison. You can escape it, but you need tools. And so identities (theories, metaphors, words, whatever) also appear to be bricks: they form the prison walls, but can be pulled out and hurled at the bars, or recombined to build a bridge or redirect a stream, establishing new linkages. Connect, connect, connect…

    That total spending is less in one period than in another tells us nothing ipso facto. The identities (effectively) mean nothing in and of themselves; but we are not interested in the identities in and of themselves. We are not monks counting angels on pinheads. At least, I am not. I’m an engineer. I’m trying to design bridges and repair alternators–building the abstract machine.

    “[T]he “profit” accruing to a surplus nation, at least one accumulating its trade partner’s fiat, tends to be accounting profit but not real profit”

    Surely the “profit” is felt as a net spending stimulus flowing from deficit state into the surplus state. The cost to the former is underutilised resources (esp. labour), while the “profit” accruing to the latter is its obverse. The financial claims China stockpiles are just claims on future US output, meaning that at some point in the future this net stimulus will reverse and flow back in the other direction.


  7. vimothy writes:

    The goal is always to build the “abstract machine”. It is impossible to overstate this. Insofar as I am failing, then the (triviality) identity you apply to my posts is certainly fair.

  8. Steve Randy Waldman writes:

    vimothy! — I certainly didn’t mean to call your posts trivial at all! If I’ve given that impression, I certainly apologize for it. Accounting identities may be arbitrary and trivially (tautologically is the word I’d use) true. But that doesn’t make them useless at all. It’s what we construct with them that matters, and how those constructs helps us to think about the world. We have to be careful not to confuse our tautologies for preexisting laws of physics or human behavior, but so long as we avoid that, they can be very helpful!

  9. JKH writes:


    The treatment of a current account deficit as analogous to a corporate loss is fairly straightforward in accounting terms. But it’s analogous to a divisional loss; not a consolidated corporate loss. Therefore, it doesn’t reflect a national loss in a way analogous to a bottom line corporate loss.

    The national result is equal to the amount of national saving – the addition to or subtraction from the net worth (equity) of the nation; i.e. analogous profit or loss for the nation.

    National saving plus the capital account surplus (the inverse of the current account deficit) equates to national investment.

    So national saving (profit or loss) equals national investment less the foreign saving supplied by the capital account surplus.

    This result is entirely independent of how capital inflows are “allocated”. Such allocation is a mug’s game. Domestic investment is what it is, based on domestic demand for investment. The allocation of capital inflows can be viewed in an infinite number of ways, due to the infinitely granular nature of financial intermediation. Capital inflows can be viewed at the macro level as financing the difference between domestic investment and domestic saving. Or they can be viewed as “vendor financing” for the goods and services purchased on current account deficit. Or they can be viewed as any one of an infinite number of variations in between, particularly in the case where there is so much government finance at the margin of the international intermediation. The only real exception to this finance malleability is the case of foreign direct investment.

  10. JKH writes:

    What I’m saying is that for a given level of GDP (even the optimal level), a given level of domestic investment (even the ideal level), and a given level of current account deficit (or surplus), there are an infinite number of ways you can split the mix of consumer goods production and investment goods production as between domestic and foreign sources. Who’s to say that the ideal level of domestic investment requires those investment goods be produced by foreign rather than domestic sources, and that consumer goods be produced vice versa? Why should that particular asymmetry result in the optimal GDP solution for a given level of current account deficit? Why should we prefer that investment goods be produced by foreigners rather than domestically?

  11. Indy writes:

    I prefer the import-certificate idea to the proposed capital control regime, but mostly because I think it would be 1. Legal, even under under WTO/GATT rules, 2. For the previous reason, when initiated by the US, likely to spread internationally, not as a “global trade war” but as a “global market-managed system of perpetual trade balance” and 3. Easy to implement by piggybacking and riding on top of the existing customs and Sales-Of-Goods-Across-Borders system as a tiny added burden, as opposed to requiring an entire new level of (eminently fallible) government financial monitoring and regulation.

    I think it might actually help prevent trade-wars and fraudulent blocking efforts as well. If the Korean or Japanese governments wants to try and propagate a fraudulent “American Beef” scare, then they know that the obvious consequence would be a drop in their own import-certificates to export to America. This would keep countries honest, especially exporting ones, and *more* devoted to open trade practices.

    Yes, there will be clever financial ways to get around it in the total Current Account, but there would still be a balance of goods-productive output and capacity. Services, I suppose, should also be incorporated into this system.

    It would also help prevent some of the cheating that goes on with imports. Foreign exporters don’t want to be accused of dumping – the selling abroad at prices below those extant in one’s home market. Dumping penalties are a huge pain, and one of the easier “remedies” the WTO permits and which the US tries to use frequently, sometimes as a “shadow protectionism”, but sometimes also with legitimate need.

    Foreign exporters seeking to do this are often tempted to “mark up” the purported sales-price on the customs forms records so they can have a paper trail that shows “equal pricing” in the home market, but where actually the importing party paid much less and will retail those items at low prices consistent with the real sales price. There are all kinds of enforcement issues – including “kick-back” payments of the difference between real and purported prices, etc…

    But with import certificates, The customs official would look at the paperwork and says, “Very well, it says the sales price is $10 Million, where’s your $10 Million worth of import certificates then?”. It automatically makes cheating the dumping rules very costly, a self-enforcing mechanism.

    On a completely different subject, I was wondering if you could write a post on what a gradual reversing of capital flows might look like for the US.

    Let’s say China’s growing prosperity means they simply cannot come close to domestically supporting themselves in raw materials, agriculture, and natural resources. They will need more oil, coal, meat, iron, etc… One would expect the price of these commodities to rise, and the real value of the Yuan to start to fall until it actually matches the nominal peg to the dollar. After that, to hold the peg, the Chinese would stop accumulating and start selling Treasuries to pay for these imports in dollars.

    Those treasuries would either be repatriated to American firms or would end up in other nations – like desert OPEC countries – who export things China wants. But I’m assuming that all gets repatriated too in the end, for goods that these accumulators are short of, and which we have plenty of. There are lots of potential industries this could effect, but in terms of commodities, the one that leaps to my mind fastest is “food”. Population growth, lack of water, scarcity of arable land, scarcity of fish, changes in dietary preferences to more intensive products like meat, and a highly productive and expandable American agricultural sector.

    Someone please run me through the kinds of things that will happen to our economy when we lose our ability to sell debt abroad and start to exchange several trillion dollars in bonds for beef.

  12. PierGiorgio writes:

    This idea seems politically (and economically too?) tough, hard to do it in a (COUNTRY A, could be Spain) trade deficit economy, except in a full employment situation. Imagine today a small/medium open economy blocking investment pouring in from abroad while factories are closing, stock exchanges are depressed, sovereign debt sales may become a thriller, etc… A depressive/deflationist idea (except in full employment models), or am I wrong?

    And may it not also become an incentive for invoicing the debt in foreign currencies? If this is true, we get some deflationary impact:

    COUNTRY B (surplus country) will say: “Ok, Won’t buy your country A paper else you tax me… bring your currency A to my (surplus) country B, then I’ll change your cash in my currency so that either (a) the exchange rate is fixed and your central bank will have to absorb the money, and you get deflation (Spain vs Germany is a good example); or (b) nominal exchange rate will depreciate but if the debt is denominated in foreign currencies you get a negative (contractionary) effect here.

    Thanks for your clarifications

  13. DR writes:

    “Chinese consumers of purchasing power, and shared the loot between Chinese elites and Western consumers.”

    The biggest winner has been the financial sector of the US profiting from the US export of debt-along with the secondary class of the priesthood of free market economists.

  14. vimothy writes:


    You are right to be suspicious. Suspicion is the only proper state in which to approach these problems, since none of us can have certainty. We ought to be in doubt.

    I agree with what you say, with one small, perhaps trivial (!), qualification. The abstract machine does not only represent the world; it also interrupts it. Ideas are constantly performed. Just ask Mencius–or Keynes. (As Callon likes to say, “No economy without economics”)!

  15. vimothy writes:

    And of course, nowhere is this more true than the prison-house of Wonderland itself.

    Food for thought. Or maybe not…

  16. It’s pretty clear that cross-border property ownership frequently contributes to small country real estate bubbles, though I’m not sure how compelling that case is for the US.

    Good point. There isn’t a U.S. that can be purchased. There are a lot of geographically local regions — like Hawaii — that could turn into frothy markets. In fact, real estate in Hawaii was a bubble just prior to the collapse of the Japanese economy in the early 1990s.

    This thought experiment is very useful though. If we think of sovereigns as corporations (which, in the U.S. case, is not particularly counterfactual!), and their currency as debt, then their land is akin to equity.

  17. moldbug writes:

    From Henry Morgenthau, Jr., Germany Is Our Problem (1945 – a fascinating work for many reasons), p. 34:

    Clearing agreements were bilateral arrangements ostensibly designed to prevent exchange fluctuations. They did it by carrying on trade between the two countries at an agreed rate of exchange without either using the currency of the other. Importers paid the clearing office in their own currency. Exporters were paid by this clearing officce, also in their own currency. In the long run the accounts had to balance as between imports and exports and between the two countries. A typical transaction between Germany and Poland would work like this:

    A Pole sells a German a trainload of timber. The Polish clearing office pays its citizens in zlotys; the German timber buyer pays his clearing office in marks. In order to get its money back, the Polish clearing office has to be sure a Pole buys something in Germany of the same value as the timber – automobiles perhaps. When the Polish dealer buys German cars, he pays zlotys into his own clearing office; the German clearing office pays the German car manufacturer off in marks.

    I am typing this from a piece of paper which is 65 years old. So, definitely not invented by Warren Buffett. :-) Note that this, Nazi, version of Buffett’s idea is bilateral rather than multilateral – the import-from-Poland certificates are Poland-specific. Presumably this had some advantage for Nazi foreign policy. I am not sure what it would do for ours. That would require assessing the goals of our foreign policy, which is again a whole different can of wax :-)

  18. John Bennett writes:

    This is a mind-blower to me at the theoretical level, as it has so many neat positives.
    In order to judge this proposal, what are the alternative mechanisms that would force capital flows in and out to balance? We have one here–import and export certificates. Are there others?

  19. No comments, let see this video, it talks by itself easily create a website

  20. john c. halasz writes:

    “After all, the United States has run very large current account deficits, but its net international position has been relatively stable, because foreigners’ return on their US investments has been abysmal compared to Americans’ return on their gross foreign investment.”

    The identity of “Americans’ return on their gross foreign investment” needs to be further specified. You’re right that, til now, the excess in profit of “U.S.” foreign investment compared to foreign “investment” in the U.S. has rendered the trade imbalance seemingly sustainable, at least according to those captivated by GE theory. But, aside from the considerable measure of tax arbitrage ingredient in the official figures, likely the discrepancy is because the lion’s share of the gains from “free trade” were not captured by any “consumer’s surplus”, nor by foreign (Chinese, etc.) companies or workers, but rather by MNCs, Wall St. financial machinations, and the wealthy investor class, who are less their marks than their clients. And the global effects of increasing global wealth inequalities, as effecting global aggregate demand, need to be taken into account, in assessing the “gains” to “free trade”.

    Actually, you’re just reproducing much of Keynes’ thinking on global trade, which was only imperfectly realized in the actual Bretton Woods agreement.

  21. Julian writes:

    In regards to tariffs and duties it seems to me that you have passed over an upside to them which is infrequently mentioned. While the dangers of encouraging politically favored industries or, perhaps even monopolies, is great, by increasing the competitiveness of regional companies politicians have the potential to essentially “buy” jobs for the general populace through tariffs and duties, at least in the short term. A good example of this would be the agricultural sector in France, the existence of which is essentially “bought” through that nation’s severe food tariffs, or the Japanese rice industry (though technically I think that’s protected not by tariff but by legal restrictions on rice importation). Given, the citizens themselves often end up paying for these jobs with artificial prices for goods and services, but it seems to me that, facing the current job situation in this country following 40 years of tariff reduction and branding laxity, it is a side to tariffs which we should consider, at least as a short term fix, particularly given that firms show no desire to hire and the government no desire to pursue public works projects of the magnitude necessary to reboot the labor market. Of course, such a job-creation plan assumes that the managers of the tariff-protected industries would use the extra funds to create new jobs and not to line their pockets, a supposition which, given the current state of thinking regarding corporate governance, is somewhat unwise for one to make. It also assumes that companies like Walmart, which depend on low cost imports, would have less pull legislatively than depressed regional manufacturies, which would be an equally egregious assumption for a variety of reasons.

    Of course, one can do this without tariffs through currency manipulation; your first point describes perfectly how China has done so and the benefits they have accrued. However, a rapid and extreme devaluation of the dollar might have some rather negative consequences for all involved, so following their example would likely be unwise.

  22. avmed writes:

    Rates are going up, and that means bonds will go down. Don’t need a bubble for that.

  23. I am in bonds short term with 30 percent of my assets. Unfortunately I am concerned that there will be an alliance between homebuilders and govt to increase an already bloated supply of homes. that is why their stocks have stabilized.