Balance of Payments
By David Henderson
The latest Freeman just came on-line and carries my piece on the Balance of Payments. It’s basic economics that many people who read this blog already know but also many probably don’t.
Quick. What’s the trade deficit between California and the rest of the world? Don’t try Googling it because you won’t find an answer. No government agency–or private entity–computes the dollar value of goods that people in the rest of the world sell to or buy from Californians. Why not? Because it doesn’t matter.
Yet governments do that computation for countries. Do trade deficits between countries matter? They do, but a lot less than most people think. A high trade deficit is not a definite sign of an economy’s weakness, and a low trade deficit or high trade surplus is not a definite sign of an economy’s strength.
What if the money doesn’t come back in any of the above three forms of investment but, instead, is held in U.S. dollars? That’s even better for Americans. Instead of giving up capital in return for merchandise, we are giving up paper money. According to the Bureau of Engraving and Printing, the average cost of a unit of paper money is 6.4 cents. Because of the production process, the cost is probably higher for a one-hundred-dollar bill, and presumably a disproportionately high number of such bills is held abroad. But it’s still likely to cost under 25 cents to print a one-hundred-dollar bill, and the bills take an average of 89 months to wear out. Getting valuable goods in return for paper money that sells for dollars on the penny is a good deal for Americans. Jay Leno, in a 1980s ad for Doritos, said “Crunch all you want. We’ll make more.” Similarly, if people in other countries hold on to their paper U.S. bills, the Federal Reserve can make more.
And, of course, I also tell of Michael Dukakis’s attack of foot-in-mouth disease during the 1988 presidential campaign.
HT to Jeff Hummel for looking it over before publication.