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Friday, January 25, 2013

The battle of current accounts

It seems that globalization may lead to a battle of current accounts. One of the few things on which economists seem to be able to agree, at least I think so, is that current account balances are a zero-sum game when consolidating them worldwide: One country's surplus is the rest of the world's consolidated deficit.

It also seems that nearly every country plans to stimute its economy through the expansion of exports, through the improvement in current account balances. For this to work, planet Earth will have to find another planet in a hurry, a planet which is prepared to run enormous current account deficits provided planet Earth gives them the funding.

During the opium wars of the 19th century, the British and the Chinese found out what happens when one does not understand that international trade needs to be structurally balanced over time: When that happens, international trade no longer provides for the wealth of nations which Adam Smith predicted.

Below is the text of verbal exchange between the Taipan of the Noble House and his son Culum Struan, taken from the movie 'Taipan' and based on James Clavell's bestseller. Culum has just discovered that his father trades with opium and he challenges him as follows:

Culum: "You trade in opium. You smuggle. You have done it for years!"
Taipan: "What did you think I did?" 
Culum: "I thought you traded. Goods from England for tea from China". 
Taipan: "The Emperor will not let us sell goods from England. Yet he demands silver for his tea. And if we paid in silver, it would bankrupt England within a year. So we sell opium to the Chinese for their silver. And give it back to them for tea. That’s how the China trade works". 
Culum: "Opium for tea?" 
Taipan: "Why not? I didn’t invent opium nor the trade".

The British and Chinese ended up settling the issue of one-sided trade through wars. Warren Buffett thinks the peaceful way of simply buying the trading partner is better. Whichever the case, international trade cannot go on forever if it is structurally one-sided.


  1. It is a well known fact that if you add the published current account deficits and surpluses for all countries you don't get zero or something close. For example adding the current account balances for 2011 from the CIA yearbook you get a non-zero result. It is obviously strange for the world to run deficits or surpluses with itself. How is this possible? Are statistics manipulated? Is it because conversion to US dollars (all such data are in US dollars) creates artificial errors, eg by doing conversions from local currencies during different times, creating different dollar value for the same amounts in local currency? Or is it because the US is printing dollars like there is no tomorrow? The last case is like England having a silver mine to pay for tea. Any ideas are welcomed.

    1. An economist could give you an exact answer, I can only give you a general one.

      Currency conversions are one of the reasons explaining differences. Another, and very major reason, is that exports/imports can be recorded by different methods between the countries exporting/importing (FOB or otherwise).

      Finally, the periods may not match. For example, even between the Bank of Greece and ELSTAT do you get wide, really wide differences as regards the reported Greek exports/imports, and no one has been able to explain that to me so far.

      Nevertheless, the common sense fact holds that what one country exports must be imported by other countries, and what Greece receives as income from foreign tourism must be expense for foreign tourism in other countries.

    2. Is it a zero sum game with services like tourism and education where many tourist and student purchases are made in country? And sometimes tourists (backpackers) and students earn income in the country they're in, and they usually spend it there too. How does that fit into the balance of payments.

      I believe Switzerland imports & exports more copper wire than it uses or makes - i.e it speculates in copper wire. I doubt that the physical wire gets within a 1,000km of any Swiss border. Should speculative buying and selling count - especially when the goods don't even cross the relevant border.

      How does the Currency War - US, Eurozone, UK & now Japan versus The Rest of the World - relate to the Current Account Battles?

      It's often forgotten that the French & Americans were belligerents in the 2nd Opium War - on the side of the British of course.

      When the British reached Beijing in 1860 they destroyed The Summer Palaces. In 1793 Lord Macartney observed that they were the equal Capability Brown's creations (Kew Gardens etc), it would not surprise anyone if they were not indeed better. Its also easy to imagine that Coleridge would have known, or known of, Macartney, and to have drawn on that for his "In Xanadu did Kubla Khan / A stately pleasure-dome decree..." poem.

      Why am I mentioning this, the 7th Lord Elgin, spent time in Greece inspecting and acquiring artifacts from famous ancient ruins. His son, the 8th Lord Elgin, was the British commander in the Second Opium war who ordered the destruction of the Summer Palaces. Hmmmm!


  2. I guess this discussion proves something that everybody knows but rarely discusses. If collecting reliable data is almost impossible, then econometric models can never really work, at least when it comes to national economies. By the way this constitutes formal proof. So, while we all know that current account deficits will eventually do you in, precise prediction (when, how much etc) is impossible. So, back to political management, macroeconomic guesswork, microeconomic and political reforms. And back to politicians claiming that because we are spending like drunken sailors for 20 years we can do it for ever.