To: Hawkmoon who wrote (2687 ) 12/25/2000 12:14:07 PM From: Hawkmoon Read Replies (1) | Respond to Actually, it might be beneficial to post that article on BOP issues:newaus.com.au The balance of payments myth According to the accepted view, a surplus on the current account of the balance of payments is considered as a positive development while a deficit is seen in a negative light. The deficit is viewed by almost everybody as a symptom of bad economic health. The popular view maintains that it is the role of the government to introduce a suitable mix of policies which will guide the economy along the path towards a "favourable" balance of payments. In a free market economy individual decisions regarding the selling and buying of goods and services, i.e. exports and imports, is made voluntarily, otherwise it would not be undertaken. The emergence of an exchange between individuals implies that both expect to benefit. If an individual wants to increase his purchase of goods and services, i.e. lift his imports, he will have to earn a corresponding amount of money through selling, i.e exporting, his goods and services. The more he can earn through exports the more imports he can afford. The creditor who supplies the required funds does so because he expects to profit from that. Subsequently, if the debtor, for whatever reasons, cannot honour his debt, this financial crisis is only of concern to the parties involved and of little importance to other individuals in the community. While the national balance of payments as such, is a harmless definition, the government reaction to it produces harmful effects. Government policies that are aimed at attaining a more "favourable" balance of payments figure by means of monetary and fiscal policies disrupt the harmony in the market place. This disruption leads to a shift of scarce resources away from the production of most desired (by consumers) goods and services, towards the production of less desirable goods and services. one is then tempted to suggest that it would be a sensible idea to have balances of payments of cities or regions. After all, if we could detect the economic malaise in a particular city or region, the treatment of the national malaise could be made much easier. Imagine then that the economists in Sydney have discovered that their city has a massive current account deficit with Melbourne. Does this mean that the city of Sydney authority should step in to enforce the reduction of the deficit by banning imports from Melbourne? Luckily we don’t have inter-city balances of payments and it seems that no one is concerned with this issue. Yet the principle of our argument about the inter-city balance of payments is also valid for the national balance of payments. The concern expressed by most economists that an "unfavourable" balance of payments is bad for the economy is a baseless assertion. No individual or group of individuals can suffer as a result of a non-existent mythical entity. The only reason for suffering can emerge from a drop in incomes of individuals as a result of government tampering with the economy. The principles that we have applied to show the emptiness of the national balance of payments concept can also be applied to the national foreign debt. There is no such thing as national foreign debt since nations as such do not borrow or lend only individuals can do that. Consequently, if an American Jones lends money to an Australian Smith the entire transaction is their own private affair and is not of concern to any other. Both the American and the Australian are expecting to benefit from this transaction. Lumping individuals foreign debt into the national foreign debt doesn’t make any sense. What is this total supposed to mean? Who owns this debt? What about all those individuals who do not have foreign debt?, should they also be responsible for the national foreign debt? The only situation in which individual Australians should be concerned with foreign debt is when the debt is incurred by the government. The government is not wealth creating unit and as such derives its livelihood from the private sector. Consequently, every foreign debt government incurs means that the private sector will have to foot the bill some time in the future. It follows therefore that the only foreign debt that should concern various credit rating agencies is government foreign debt.
