Realist, not conformist analysis of the latest financial, business and political news

Tautology Alert – The Balance Of Payments Balances

Trade’s been going on a long time

It was Adam Smith who pointed out that there is nothing so ridiculous as worrying about the balance of trade. Because we buy more traded goods from foreigners than they buy from us? And? All that then happens is that foreigners must buy more capital items from us than we sell them. Simply because the balance of payments does balance.

As the Office for National Statistics tells us:

1.Main points
The UK current account deficit widened to 4.3% of nominal gross domestic product (GDP) in 2018, from a deficit of 3.5% of GDP in 2017, and remains high by historical standards.
This was driven mostly by the widening in the trade deficit from 1.2% to 1.8% of GDP in 2018 – the largest trade deficit since 2010; in addition, there was a slight widening to the deficits on both primary income and secondary income, which reached 1.3% and 1.2% respectively.
The UK financial account recorded a net inflow of £77.2 billion in 2018, equivalent to 8.3% of GDP, as foreign residents invested £177.7 billion in the UK offset partially by UK residents investing £100.6 billion overseas.

To give a pencil sketch of what is happening here. We buy more physical goods from over there than we sell over there. We sell more services over there than we buy from over there. The first is the goods trade deficit, the second the services trade surplus. The two together are the trade deficit.

There’s a certain amount of messing around with how much we’re paying foreigners in interest and dividends and the like, how much we’re collecting from them. That makes up – roughly enough – the current account.

Which is always balanced, by definition, by the capital account. Because that balance of payments always balances, it’s a definition. If Johnny Foreigner is buying less of these current things off us than we are him then he must be buying more of the capital things than we are.

If we’re buying his wine then he must be buying our companies, houses and land. That is, there is no problem.

Except, well, what happens when he’s bought the whole country? The answer being that that isn’t going to happen.

Total net household wealth – including property, cash savings and shares, pensions and possessions such as cars and antiques – increased by 15% to £12.8tn in the two-year period ending in June 2016, according to figures published on Thursday by the Office for National Statistics.

So, very roughly, we’re increasing our wealth by £750 billion a year. That’s the capital stock we’ve got to sell some of in order to finance that current account deficit.

Our net sales of those capital things is £77 billion a year. This can go on forever, can’t it?

Even better, this can go on forever and Johnny Foreigner will end up owning an ever smaller portion of our silver girt and sceptered isle.

But then Adam Smith told us this, didn’t he? And as we know all economics is either footnotes to Smith or wrong.

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4 years ago

The one thing Trump gets the most wrong! When I bought a Hyundai, it wasn’t a foreign government “ripping off America”!

4 years ago

“Even better, this can go on forever and Johnny Foreigner will end up owning an ever smaller portion of our silver girt and sceptered isle.”

Its mind bending gibberish like this that will screw us right over. If you think that a nation can continue to sell foreigners bits of paper while they send actual useful goods in return in perpetuity, then you need your head examining. Eventually the foreigners cotton on that this is a bit of losing deal for them and then we can’t afford the shiny baubles, and they stop coming. Not so cheery then eh?

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