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Branching off from my last post, I wanted to explain the relationship between trade imbalance and our debt. Essentially, no such thing exists as a trade imbalance. As far as I know, I’m the first to say this. I’m sure someone else has (I’m obviously not the smartest person in the world), but I’ve never read it. Now that I’ve said something controversial, I’m going to back it up with what most economists know, but never articulate the same way as I just have.

Let’s take a barter system. In our system we’re going to exchange apples for oranges. I have 10 apples, you have 10 oranges. I would like some oranges, you would like some apples. You agree to trade me 5 for 5. Trade is balanced (quantity equality is not requisite). Now lets add a common currency. I have 10 apples and you have 10 oranges and we each have 10 dollars. Today is Thursday, and I want to buy 5 oranges from you. You sell them to me for a buck a piece. I now have 5 apples, 5 oranges and 5 dollars. You now have 5 oranges and 10 dollars. Trade is balanced, because you wanted $5 at least as much as 5 oranges, and I wanted 5 oranges at least as much as I wanted $5.
Tomorrow is Friday, and you want to buy 5 apples from me. You pay me $5 and I give you 5 apples. I now have $10, 5 apples, and 5 oranges. You now have $10, 5 apples, and 5 oranges. Trade is balanced. And as far as product goes, our result is the same as it was under the barter system.

Now, lets look at international trade. Currency exchange is very similar to the original barter. Only this time we have Dollars and some other currency, like the Euro. In the barter system, we exchanged apples for oranges, and trade was even. In the currency exchange likewise, I can trade X Dollars for Y Euros. Since we don’t eat currency as we do fruit, the currency itself isn’t consumed. Instead, we can only exchange it for other things, just like we did the Dollars for the fruit. So in order for me to want to trade Dollars for Euros, I must want something that is purchased in Euros — probably something from Europe. So, with my Euros, let’s say I import a CD. That trade is balanced.
OK, at this point we haven’t said what happens to the Dollars. Whoever I traded for the Euros has them. Let’s say they burn them. Is trade imbalanced? No! The trade was balanced when we exchanged Euros for Dollars. Trade is an exchange specific action — you don’t have to follow the path all the way to the CD that I imported to determine if it was “ultimately” balanced, because each path along the way the trade is balanced.

But what if they burned the Dollars? Well, I could give you a bunch of mumbo-jumbo about that creating deflationary pressure on Dollars, but I won’t. Imagine you had a printing press, and printed Dollars at will. You trade them for Euros and buy a CD and they burn the Dollars. You then print more Dollars and repeat this process until you have so many CDs you have your own store! All for the cost of the paper! Well, the simple answer is that they wouldn’t burn the Dollars. They can either sit on the money (which would be temporarily the same as burning them) or they could import a CD from the US. Just like our Euro for CD trade was balanced, so is their Dollar for CD trade.

What if they bought US Treasury Bonds? Aha! There we go! There’s that “imbalance of trade” everyone is talking about! So, what mechanism FORCES that person to buy a treasury bond? It certainly has nothing to do with the nature of trade. It has to do with US Treasury Bonds looking like a good product to buy, which isn’t a force in the compulsion sense, it’s a force in the tendency sense. The whole “imbalance of trade” idea comes from us separating goods into two different categories: investment and consumables. But they’re still goods. So, the trade of dollars for Treasury Bonds is a balanced trade! The trade imbalance doesn’t exist!

If the US government didn’t sell bonds, there wouldn’t be any to buy, and the demand for Dollars would change according to what you could get with them, and with that the ratio of barter of Dollars for Euros (exchange rate). So I repeat my two points: there is no such thing as an imbalance of trade (theft is excluded because that’s not trade — likewise any conceivable situation where someone is forced to exchange), and there is no mechanism the forces debt for trade “imbalances,” debt availability causes the trade “imbalance.”