Friday, February 10, 2006

Trade deficit and Budget Deficit

I have come to read a lot about Trade deficit and budget deficit and I think many people mix the two in the same pot. But they are entirely wrong on this, because the former is an really abitary term that doesn't serve well in explaining free trade, while the latter is a definite sum game that is going to crack a nation's neck.

There seem to be some misconceptions about both terms in the blogosphere. Some think that Trade deficit is an account of the US that is running up debt, but that is not true. It is a figure of investments in and out of the US, but the measurement is rather shady and it says nothing definit about the actual wealth and development of the US economy.
Trade deficit is the tool of a statist and a protectionist who want to show that your nation is not predominantly selling things into other countries. This however is implied to be a bad thing, but it is not necessarily so, as any economist can tell you.

The budget deficit, on the other side, is a truly nasty thing, because it shows how much the GOVERNMENT of the United States is spending or taxing. In good ol' times, this banking account was equal (mostly because the gold standard prevented to much devaluation of money from the standard) or fiscally clean, but this changed when deficit spending increased after adopting Keynes theories.
However, since Keynes theories were never specified for stupid politicians and popularizing manners of politics, it failed to do what it should: Saving in boom times and spending in depressions (to accelerate recovery).

Now, there are many arguments that even this theorem of Keynes when practiced wholeheartly, is wrong on a number of things (f.e. artificial spending rather than market demand, bubble creation). I don't even want to concern myself with those (althought true) arguments, but just show that even the application of the theorem would even put Keynes spining in his grave.
Politicians just cannot follow the maxim of spending in depressions and saving in booms, because it wouldn't send the right message to the voters.
They want to get something back for their votes and so they accept that they get something in the boom times. However, this leads to a spending spiral that is uncovered in funds and can only be controlled by inflating the fiat monetary system (bank notes we use every day) or raising more taxes.
Since the latter method is rather unpopular and would turn away voters, the politicians use the state banks to devaluate the currency, which is not detected by the public (although you can see when the elder people tell about lollypops for 2 cents). There are two reasons for the invisibility of this measure.
First, it is a slow process until one sees an effect of devaluation. It needs at least 10 years to be seen by the public.
Second, it is a process that is only understood when you are an economist or have expertise in this area, which only a minority in Germany has.

Thus budget deficiency is much more important and dangerous than trade deficit.

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