The United States, like most other countries, use a method of double-entry accounting to track certain aggregate statistics known as National Income Accounting. One of the statistics tracked is the balance of trade. The balance of trade reports the difference between imports and exports. When imports exceed exports, we are said to have a trade deficit. When exports exceed imports, we are said to have a trade surplus. When the two equal, trade is said to balance. Technically, the balance of trade refers to imports and exports of both goods and services, but so much attention tends to fall just on the trade of goods, or what is called the “Merchandise Balance of Trade.”

Confusion abounds over what the balance of trade is. Even David Hume and Adam Smith note that the concept does far more harm than good. Hume discusses how those “ignorant of the nature of commerce” misinterpret the balance of trade (see his essay “On the Balance of Trade”). In the Wealth of Nations, Smith goes even farther, calling the whole concept “absurd” multiple times (see pages 377 and 488 in the Liberty Fund edition). Much of his case against protectionism and mercantilism in Book IV is aimed against the balance of trade as a whole.

With the inclusion of the balance of trade into National Income Accounting, the confusion has persisted. The connotations of the words “surplus” and “deficit” (coupled with the accounting conventions of pluses and minus) give the impression to those who do not understand the balance of trade that deficits are bad while surpluses are good. But, digging a little into the accounting shows that 1) “deficits” and “surpluses” are value-free and 2) referring to these as “trade deficits/surpluses” is something of a misnomer.

What is important to note here is that the balance of trade has surprisingly little to do with merchandise trade at all. It is actually the result of the relationship between national Savings and national Investment. Given the accounting identity

GDP = Consumption + Investment + Government Spending + Net Exports,

we can do a little algebra and show that

Net Exports = Savings – Investment

In other words, if the quantity demanded of Investment funds exceeds the quantity supplied of saved funds (Savings), the nation must import savings from abroad. That, in turn leads to foreigners buying fewer material exports, preferring to buy assets.

Both Saving and Investment are determined by factors far divorced from how many goods cross borders. Things like real interest rates, growth expectations, confidence, institutions, and other macroeconomic factors matter much more. Indeed, as noted in his textbook International Economics, Robert Carbaugh shows us that some 98% of transactions in the foreign exchange markets deal with people swapping currencies for investment purchases, not goods/services purchases. Given that the foreign exchange market handles some $6 trillion in trades every day, that’s a lot of dollars (and pounds, yen, francs, euros, etc) being swapped to align savers and investment opportunities.

Consequently, the balance of trade is a result of macroeconomic factors. Which means that, at best, the balance of trade is a symptom, not a cause, of macroeconomic phenomena. Furthermore, since nations do not trade, but rather individuals do, to properly understand any trade deficit, we must understand why there is a difference between Savings and Investment. Investment will come from firms (note: it can be financed by borrowing, but doesn’t have to be) and individuals making large capital purchases, like a house. If these individuals are using Investment to create long term productivity enhancements, then a trade deficit is a signal of good things. But, if borrowing is going on where there are no such productivity advancements, then the trade deficit can be a signal of bad things. Regardless, and this is the big takeaway here, the balance of trade has little to do with trade at all. It is determined by much larger macroeconomic factors.

Thus why I titled this post as I did. It probably would have been better to call the balance of trade the “balance of savings” or something like that—although there still would have been much confusion. No nation, government, or entity is legally responsible for the balance of trade. A trade surplus does not indicate profit, nor a deficit indicate loss. A trade balance doesn’t need to be “financed” in the colloquial sense, nor does the deficit imply increased indebtedness. These terms are used for no other reason than accounting convention. They’re a historical accident of including trade in a system of accounting, nothing more.

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WASHINGTON, D.C. — Director of National Intelligence Tulsi Gabbard was forced to resign on Friday after President Donald Trump discovered that she's not blonde.

U.S. — After yet another failed assassination attempt against President Trump yesterday, the national media has agreed to just start reporting when Trump wasn't shot at.

In downtown Dallas at 501 Elm Street, a few steps from Dealey Plaza, sits a two-story museum dedicated to money. Not the kind of museum where currency lives behind glass. Visitors here are handed a route through 28 exhibits and told to touch everything.

Some of it is pure spectacle. There is a booth where dollar bills shower down on whoever steps inside. There is a vault visitors can attempt to break into by dodging a laser grid. There is an 80s investment banker who reads guests' financial futures with great confidence and questionable accuracy.

Other exhibits are quieter and more curious. One small room asks visitors to barter their way to what they need without any money at all. Most adults give up within a couple of minutes and rediscover why people invented currency. Another lines a wall with real and counterfeit bills and asks visitors to pick out the fakes. A third tells the story of Mademoiselle Zélie, a 19th-century French singer who was paid for a Pacific island tour in livestock and produce: three pigs, twenty-three turkeys, five thousand coconuts, and fifteen hundred oranges, among other things.

Tucked between the photo ops are panels on the real history of money. Bronze knife-shaped and spade-shaped Chinese coins from 2,700 years ago. The story of Y'all Street, the Texas stock exchange opening in Dallas. Why gold became valuable in the first place (it doesn't rust, it's rare, and it's easy to shape).

The space rewards curiosity at any age. Children come for the cash shower. Adults stay for the bartering room.

“The return of the Right in 2016 and again in 2024 was not an intellectual revival. It was not driven by theory or political philosophy, but by visibility and reach: Jordan Peterson debating feminists, Charlie Kirk confronting campus socialists, Donald Trump dominating the podcast circuit. The Right returned culturally, but with an intellectual vacuum at its centre: most notably, a lack of serious economics.

For classical liberals looking back decades from now, this revival of the Right is unlikely to inspire them in the way Thatcher and Reagan still do today. The politicians of the 1980s were what George Will called ‘conviction politicians’: figures who entered politics with a coherent social creed. Politics for them was not merely about remaining in power, but about pursuing a broader mission of prosperity. That mission was not to control the economy toward a collective goal, but to empower individuals to make their own decisions.

Today’s Right, by contrast, is dominated by political entrepreneurs: figures highly skilled at attracting attention and mobilising voters. By nature, they are populists, and populism is the direct translation of public emotion into government policy. Without intellectual grounding, politics becomes purely oppositional. Today, lacking any clear sense of direction in economics, the Right is often effective at identifying problems but incapable of solving them.”

– Mani Basharzad

“The richest person in the world in the 1830s was Nathan Rothschild, whose personal net worth was around 0.6 per cent of national income. Despite this vast fortune, Rothschild died at age 58 in 1836 of an infection that $10 of antibiotics could likely cure today. Similarly, the richest people in the world today, such as Bill Gates or Jeff Bezos, presumably have a marginal utility from additional consumption spending that is zero. Nevertheless, their utility still increases when new goods (smartphones or LLMs) are invented. These examples suggest that more consumption of a fixed set of goods eventually hits a marginal utility of zero while the invention of new goods or higher quality goods continues to increase wellbeing.”

As seen on a Students For Liberty comment on a Facebook page I follow. The quote was cited by this chap: Karthik Tadepalli, of the Becker Friedman Institute For Economics, University of Chicago. I don’t have the original link. There are some super-smart young classical liberals out there, and many seem to be coming from places such as Eastern Europe, India, etc.

The point about marginal utility reminds me of a comment from Perry Metzger on this blog on 2014, debunking the Thomas Piketty book that purported to claim that wealth rises faster than the overall economy and that the “rich” will eventually swallow up the world unless restrained by wealth taxes and so on. Perry M got in a reference to Douglas Adams, which is always the mark of a good article, IMHO.