Trade balance

Paying with debt

Via svembu.

Countries adopt “beggar thy neighbour” policies. i.e, currency suppression to promote exports - China, Germany, Japan all do it - is one reason. This is based on the mercantalist fallacy “we only sell”.
China has achieved these surpluses by suppressing domestic consumption and focusing on exports.

There is a Tamil sign we used to see in shops: கடன் உறவைக் கெடுக்கும் (debt destroys relationships). It means “Please pay for your goods, don’t ask us to postpone your payment”. Here is the problem: global free trade is fundamentally incompatible with ever-expanding global debt (as measured by global debt to GDP ratio). The old Tamil saw is right after all - debt does destroy relationships, and that’s true in the village and true across nations.
We have erected the entire global economic edifice on “we can pay for it later” and when a crisis erupts “we can keep kicking the can down the road”. The fatal conceit is that this can go on indefinitely. This is the conceit global monetary authorities have been on.
If a country only exports and does not import, eventually it will come to own all assets in other countries. Look at China- India trade. China has to keep looking for investments in India to deploy its surplus and as a mirror image India has to sell itself in bits and pieces. -Unemployment and underemployment are serious in importing nations.

There are two fundamental reasons it will end: rising trade frictions.

This system is breaking down because importing nations can no longer afford more debt based “prosperity”.

To restore harmony in international relations and to preserve free global trade, the system has to get back to balance.
To achieve that balance in global trade, we need something like the gold standard to settle inter-country trade. Paying with debt is not a good substitute.