a comment and my reply, namely for those who see this analysis and think it's economics; it is not, this is accounting. accounting has mechanical functions, not theoretical. I hope this further illustrates:
COMMENT:
The logics is correct but please know that the only accounting identity involved is that if you account for both legs of a transaction, one positive one negative, then things will balance.
It’s about the real world, not the painting we make of it.
MY REPLY:
This comment is superficially right, but profoundly wrong in what it implies. The confusion here is treating this as if we have agency over what to account for. We do not.
The Current Account and Capital Account relationship doesn't depend on "accounting for both legs": because one leg necessarily creates the other. They're not independent variables you can manipulate separately.
When China runs a $500B trade surplus, others MUST run deficits totaling $500B. This isn't a choice or a painting, but undeniable arithmetic.
Every dollar of excess savings exported from Germany or China has to be absorbed somewhere. The US doesn't "choose" to run deficits, it's forced to when counterparties run net global surpluses. To disagree with this statement is to reveal accounting illiteracy.
The Current and Capital Accounts are dyadic: each leg defined and constrained by the other. Saying "if you account for both legs of a transaction" is a truism. It's impossible to not account for both, because one creates the other, and vice versa!
He's doing what almost all do: ascribing top-down stories to what is axiomatic at the baselayer. It's precisely this kind of thinking -- inverting causality in the process or seeing it only as mono-directional -- that causes confusion regarding tariffs, trade, and rectifying imbalances.
If you change one side of this accounting equation, you must change the other. Decrease one, you force a raise for the other. You do not need any economist "paintings" for this, only accounting. It's called a 'balance sheet' for a reason.
This becomes much clearer when you understand some elements of life always adhere to bottom-up rules, and are immune to top-down narratives about why they exist. Under certain conditions, certain traits will always exist: know the conditions, discard the stories.
Fix one side, the other side follows suit... it doesn't matter what story you tell.
Hm. The share of national income that goes to workers vs capital is roughly the same in Canada, Germany, and the US (used to be about 60% but dropping since 2000). But the share of GDP going to workers in Mexico is far, far lower, and is even lower than in China. So if domestic demand is based on worker wages and countries with lower return to their workers are net exporters bc their domestic demand is lower, Mexico should be exporting more than China, and Germany should be roughly the same as the US and Canada.
Your theory regarding domestic demand reflecting worker wages given owners of capital don't spend it all makes sense, but that doesn't seem to support that explanation for Germany being a net exporters bc their workers are paid roughly the same share of their national GDP as in the US and Canada. It really seems that in Germany's case they just must prefer saving to consuming (relatively). And how to explain how much Mexico is importing, when their workers are doing terribly as far as share of GDP?? Are they all just in tons of debt and buying on credit or something?
Labor race to the bottom is certainly apparent globally, given worker share of income is falling rapidly in every country since 2000.
I agree we should be taxing capital gains on foreign investment in the US and have a massive amount of wiggle room prior to the point we might have to worry about insufficient capital or investment flows. But frankly we should also be taxing it more domestically, since capital is taxed at only half the rate of labor, and theres no evidence that tax rates on capital have any effect whatsoever on investment rates, which have been steady at around 20% despite massively fluctuating capital gains rates historically.
These are thoughtful points. However the focus on labor share of GDP misses a crucial point about what's driving the competitive advantages and BOP outcomes.
You can end up with the same overall labor share of GDP in countries, yet still have big differences in how much each worker gets relative to their own contribution.
“What fraction of the economy goes to wages” < “What fraction of each worker’s output is returned to them”
Labor's share of national income appears similar (around 60% in the US, Canada, and Germany), but what matters is whether workers' compensation reflects their productivity. It's the productivity share of GDP that matters. having the same labor share of GDP (say, 60%) does not automatically mean each country’s workers are being compensated in line with the amount they produce. That's where the hukou and hartz systems take their toll.
Two countries could both allocate 60% of GDP to labor, yet if one country's workers are more productive and don't see wages that reflect that, they're effectively **underpaid relative to what they produce**. This results in a consumption gap, and results in an export/trade competitive advantage to the country underpaying labor relative to what it produces.
What I mentioned about harming domestic demand when you undermine the wages of labor isn't a theory, it's empirical: workers consume a much larger amount of their income than capital/the wealthy. This necessarily harms domestic consumption when you undermine their wages relative to their productivity and instead allow it to disproportionately flow to capital/the wealthy.
You then export that weak domestic demand onto other nations when you can't sell it at home.
To illustrate: on a GDP/worker basis, Chinese workers are around 20% as productive as US ones. If they earned around 20% of the wage that'd be fine and not a competitive advantage. But they don't, they earn 10-15%. This is a major difference. Another source on this: https://americancompass.org/bad-trade/
The average German worker is around 85-90% as productive as the US one, yet his wage is 75-80%. Same manipulation.
Both China and Germany have productivity-income gaps relative to the US and it allows their persistent surpluses to exist: the average Chinese worker produces about a fifth of what an American worker does, but consumes an even smaller fraction of that output. Same for Germany.
That's what encourages this toxic global race to the bottom and allows large, persistent trade imbalances (which should not consistently exist without a manipulation occurring). It's mechanical, and byproduct of industrial policies that end up impacting trade and BOP outcomes.
Thanks, I didn't realize German workers were more productive than US workers. And I guess by that same token, workers in Mexico must be much less productive, to be even lower than their share of GDP in wages?
I think a problem you have ommited is the dumping of goods, warm bodies and fentynl via México and Canada to game the trade agreements. If a friend is willing to damage you for their own gain they are no friend. Canada and México failed this metric in monumental manner.
When they act like friends we treat them as such.
The sellout/financialisation by our own elites is another aspect that was not covered. The loss of American production has made many rich.
This is a complex topic. You have an interesting perspective. I consider all of the countries pulling us down (middle class) are not on our side. México and Canada are less bad then China but they are still a net negative to the American middle class. Helping themselves while helping China that is harming us is not acceptable.
ty for reading. I didn't omit that, I addressed that in the very first paragraph: this is purely a trade analysis framework. it has nothing to do with any drug/immigration topics (unless the immigration is analyzed for its wage-suppression techniques). this is a direct analysis regarding only the balance of payments and exporting/importing dynamics.
Canada and Mexico are allies in this trade war for the simple accounting reality they make the US deficit smaller: I was pretty clear on the terms through which I see them as allies, and it's only in this way. in the ways you're describing, I agree with you, they're not friends.
think of it this way: they're allies in global trade in the same way the USSR was with the US in WW2. does that mean they're friends through and through? no, of course not. but there are more serious enemies to be dealt with right now, and they are helping you in that fight. once the greater foe is taken care of, then we can deal with the more trivial matters.
germany and china are creating your structural issues, because they are draining your supply chains with their perversions and creating your deficits in the process: the accounting is what it is, and globalism demonstrates this. they're why detroit is gone, and why supply chains have left. you deal with them to fix your real problems.
The logic of your analysis isn't wrong, but it's not what happens in the real world.
So for instance, your logic would make sense if the following were true:
- Gold standard for balance of payments
- Centralized economies (the state)
- The need for an end of year accounting at the country level.
Following your logic we'd expect capital flows between surplus countries (ex. China, Germany pre-22) to offset current account deficits (ex. USA).
But this isn't necessarily the case. Surplus countries can hoard savings, invest domestically, exchange Fiat currency for assets and monetary equivalents (ex. Precious metals).
The great misconception even academia gets wrong is the US current account deficit doesn't matter so long as private banks are willing to create liquidity and the US government is willing to issue new debt and USD maintains its role as a medium for value exchange. Worst case scenario the US and EU will lock into each other's debt spiral. The private banks hold the ultimate rotten apple, but they're happy to pretend it's edible so long as the governments are willing to provide the backstop as lender of last resort.
Consider that the academic literature (and simplistic macro models make sense) continues to pretend we live in a world where capital is limited (by Gold for example). Whereas this is not the case today. Today everything is a fubar Alice in Wonderland simulation (read RA Werner "How banks create money..." if you haven't already, it's about how capital flows work in the real world)
You can test this by applying the same logic you use. Take China and the USA. China runs persistent current account surpluses with the USA, but it does not run capital account deficits. At one point (decades ago) it purchased USD treasuries, although lately it's trimming it's holdings (Geopolitics and Russia's 300bn etc). For your logic to be true, we would have to see Capital flows, either directly or indirectly, between China and the USA in the order of magnitude of 500bn a year, either into USD treasuries (govt debt) or financial markets (private). But we do not.
If you read Werner it'll make more sense.
The whole issue of current and capital accounts makes sense in a zero sum game where even if we create a map of 2 or 200 or 2m entities, the algebraic sum of surpluses and deficits must equal 0. But this hasn't been the case since '71 (USA) and the 30s (Europe).
This is what Russia and China are orchestrating through BRICS. A return to some kind of standard (a mix of commodities would be the best possible outcome). In this scenario what you're trying to argument makes sense.
important emphasis: you do not at all need a gold standard. this is accounting. and it is precisely what happens in the real world.
everything you just said sums to "if it's a soft currency then BOP laws of accounting don't apply" (you didn't need to cite gold, you could have just said "hard currency"): this is *critically* wrong. all it does is change the calculus of default and ability to sustain a deficit. it changes literally nothing about the accounting and what sustained deficits/surpluses do to currencies and inflation.
I need to state that emphatically: this is accounting, not economics, that applies to hard or soft currencies. it is not a model, it is not logic, it is how balance sheets *must* sum. this is not at all based on "The need for an end of year accounting at the country level"; this is a non-sequitar. it's like if a country or company pretended they didn't have a balance sheet then it just goes away.
--> all a hard currency does is limit the degree of deficit you can print; the accounting does not change. it is only a governor on spending. <--
and yes, surplus countries must create deficits in other countries by necessity; global trade and capital accounts sum to zero. trade is a global system; if china had a $500B surplus, other countries will have deficits summing to an equal amount.
I am familiar with Werner, I like him in fact. there is nothing in here regarding BOP accounting and trade balances that he contradicts, or that contradicts him. he understands monetary plumbing very well, however that is a completely different conversation than trade. nowhere did I say there was a risk of hard default here.
you are overlaying macro stories about soft currencies as if they are exempt from basic tenets of trade; this essay applies every bit to hard and soft fiat.
Alright. I'm just trying to say accounting rules don't apply. So long as the USD is the global reserve currency AND there is no standard other than the USD Fiat ("soft currency" in your description), then the current account deficits don't matter in relation to the capital accounts, the transmission mechanism is broken. I'm not saying that what you're saying is wrong, I'm saying it doesn't matter.
For instance, if it mattered, the US in some way would have to stabilize it's capital accounts to match it's current account. It could issue new debt to international "investors" or it could point to matching private transnational capital inflows (into assets). But it doesn't. So then analysts (like you) zoom out and say, well internationally the algebraic sum of the balance of payments must even out (so deficits in country A offset by surplus in country B). This is partly true for everyone who is not the USA and Europe (and Canada, Australia and NZ).
If you really want to get into the weeds of the issue, it's further complicated by how we measure GDP.
All this confusion helps to maintain the current arrangement. The short answer is Power demands it to be so, because it sets the dosage (sorry, couldn't help myself).
By way of analogy, it's the same with banks and Werner. If you ask an NPC on the street how banks work, what are central banks, who controls money supply, etc, they'll give you wrong answers. Even academia can't help because they don't really know (mostly, although people have been waking up slowly, etc). But all this confusion helps maintain the status quo.
It's the same with the macro picture. The numbers don't add up. But they don't add up because they're not meant to add up. If a single country (ex. Mexico or Thailand) is short on dollars, their currency devaluates. Their only escape are current account surplus (exports) and/or capital account surplus (FDI and inflows). Meanwhile for the USA it doesn't matter. The US Fed and Treasury is not an international bank. The international banks are all private, and if a country doesn't give them carrots then the US govt uses a stick. I'm summarily generalizing, but that's how it works. Using the example, if Mexico or Thailand need USD they get them from private banks who are intermediaries.
If you know about eurodollars then you'll know that certain European banks have the privilege of printing dollars. Like others have said, it's a small club and we ain't in it.
Stefano, view this reply as something useful to you that you should not argue with that will help you understand something you clearly do not. you've made several disqualifying errors that reveal you don't understand the basic mechanics of trade. and that you think "soft currency" is my personal terminology (it's standard econ vocabulary distinguishing fiat from commodity-backed/pegged currencies, close to impossible to not encounter in this field) already signals the problem.
you keep repeating two fundamentally wrong claims: that accounting identities only apply to hard currencies (false), and that reserve currency status means sustained deficits don't matter indefinitely (false). reserve status merely extends the timeline before consequences manifest. that's it. you can dress up whatever macro storytelling you want on top of it (of which you are doing a lot) and it does not change this reality.
we cannot just make things up, say them, and make them so. I am not sharing a spreadsheet understanding, but a functional "real life how shit works" one.
for those reading, the following statements are patently incorrect. if you found this essay and are trying to learn it's important to understand why:
-"if it mattered, the US in some way would have to stabilize it's capital accounts to match it's current account. It could issue new debt to international "investors" or it could point to matching private transnational capital inflows (into assets). But it doesn't. " "The numbers don't add up. But they don't add up because they're not meant to add up. "
you are just making things up; you must stop doing this. allowing anyone to go on thinking this falsehood is a disservice to them. yes, the numbers do add up (stabilize? that is not an applicable word) because they must; because the basic flows of cross-border finance necessitate these dual entries. the only way they wouldn't add up would be to *lie about them or conceal them*. hard or soft currency, it doesn't matter.
when you say the capital and current accounts of the US, or anyone, are "not meant to add up" - this is financially illiterate. the current account and capital (financial) account MUST sum to zero by definition and it does matter. this isn't ideology or theory, it's an accounting identity as fundamental as assets = liabilities + equity.
as capital flows in, it will create deficits; as deficits occur, capital must flow in. these are a dyadic relationship of BOP accounting and the nature of trade.
look to the BEA, FRED, the IMF, whatever data source you want: the current and capital (financial + capital) sum to zero, and any deviations are transient and/or clerical (eg. timing delays, valuation methods, etc.).
you cannot escape the laws of accounting (and inflation!) by sticking your head in the sand and pretending it's not there.
-"I'm just trying to say accounting rules don't apply." "So then analysts (like you) zoom out and say, well internationally the algebraic sum of the balance of payments must even out (so deficits in country A offset by surplus in country B). This is partly true for everyone who is not the USA and Europe (and Canada, Australia and NZ)."
"accounting rules don't apply" to the US/Europe/etc. is again just saying things. every country faces the same iron law: sustained current account deficits require sustained capital inflows. the only difference with reserve currencies is the duration and magnitude they can sustain before adjustment becomes forced.
further, this isn't some kind of wonk "algebraic" stuff, it is basic arithmetic.
you will not be able to escape how these relationships must balance and create dislocations when sustained for too long and too great, no matter how many stories you insert. massive deficits cannot go on forever (this should be self-evident) no matter the printer, and saying "reserve currency" (an unofficial designation that in practice just means "schelling point fiat for commerce") changes nothing except to say 'the deficits can be larger for longer'.
trying to inject eurodollars, Werner (who is a monetary guy not a trade one), and GDP calculations into this illustrates you do not grasp the trade-specific concepts here. these are all distractions for the topic at hand.
I spend the time laying this out both for others to understand and to help someone in a way that I myself would want to be helped. spend more time on this subject. broaden who you read. Werner is great but mostly inapplicable here, study trade guys like Micheal Pettis, it will help significantly.
To clarify, this is the privilege of the USD being the financial system's reserve currency. There's no actual accounting about how many USD are in circulation (ex. Eurodollar) because it's a make believe simulation where everyone pretends the Fiat currency is a store of value. In a unipolar world this works.
At the moment because of the mountains of debt and liabilities (ex. Think derivatives) that have been created, it's in no ones interest to say the emperor is naked.
A good indicator of the current mess is the price of gold in USD. Gold is a good indicator because of what it represents in the history of money, commerce, BOP, etc.
Another good concept to keep in mind is bullshit jobs. Academia and economists and journalists and all the industries involved, need to justify their paychecks, every month. So content must be created and the more noise there is the easier it is to pretend that the simulation is really important and real.
all the reserve currency means is "there is a ton of demand for dollars and you can get away with deficits for a long time because of this huge demand for USD". it changes nothing about this essay and accounting. it only speaks to why the US has in fact been able to get away with this for as long as it has with little inflation (which is byproduct of reserve-status demand, yes).
I am extremely familiar with the eurodollar market. historically so. as in they used to be called Continental Dollars in the 1950s before they really started to develop.
It means a lot more than only that. What you're partially saying is it means one needs to purchase the equivalent USD of the goods and services for every transnational transaction, but what it by default also means is one's currency (and wealth) is and can only be measured in relation to the USD.
This means there's no need for accounting equilibrium on the USD production side.
What it doesn't mean is that supply is infinite. But as long as USD are circulating in the USA consumption based economy, and there is international demand for USD outside the USA, there is no need for an equilibrium between capital and current accounts. The current account bleeds. Ok, so what? It doesn't matter. This bleeding is absorbed by GDP growth outside the USA as this growth is always measured in USD. Global trade between South America, Africa and Asia is measured in USD. USD wins by doing nothing. This is what BRICS is trying to change.
Take a funny curious example. Before Ukraine-'22 circa 15% of global trade was in Euros, then it disappears overnight and returns to USD. Just like that, magic. No trade disruption, no financial crash, no devaluation. What happened?
- "This means there's no need for accounting equilibrium on the USD production side."
I never said deficits (disequilibrium) are inherently bad and can't happen. deficits are fine, good even, so long as there is no underlying manipulation creating them. the focus here is on sustained ones. and the accounting, and negative eventual effects, all still apply. you are tugging this conversation into one of curated macro stories instead of the mechanical, technical accounting substance that it is using to demonstrate how underhanded trade manipulations happen.
the answer for how long these can go on is not "forever"; this should be self-evident.
- "there is international demand for USD outside the USA, there is no need for an equilibrium between capital and current accounts. "
yes, and the answer to this is not "infinity demand". there absolutely is eventually a need to bring that back to equilibrium. the entire basis of your reasoning cannot be "reserve currency makes it a bottomless pit we can get away with this forever". no, you cannot. you are beginning to suffer the consequences already by way of what it's doing to your industrial base. the currency issues will eventually come to roost too.
no amount of "it's a soft currency and reserve currency so that means it has way way more demand" (this is the crux of what's being said) changes the points here. it just means you can get away with deficits for way longer than normal. that's it.
The short reply is it's all part of the plan and we are still figuring out what that plan is. Whatever the plan is we won't get priority seating.
Yeah I agree it can't go on forever and there's a limit to the manipulation. I'm implying Power throws the accounting rules in the dustbin because at the end of the cycle we're going through what will matter is asset ownership (not beneficiary) and not its value per se (Everyone with just value and no assets will take a big haircut). This cycle has played out many times before.
I don't know, I'm not sure equilibrium is necessary. You're assuming the last play of the game necessitates Power getting a haircut, I'm assuming Power will aim to sweep the table. Yes we're already in the endgame territory so like we both say (maybe for different reasons, but it doesn't matter), it's not infinite potential debt. And yes eventually the chickens come home to roost.
But don't assume we're all in this together and everyone is equal or treated the same. We don't live in a perfect world, we both should agree on this.
"You are in the domain of religion, not economic thought, if you think an action is always good, and the other always bad. The real answer is always… it depends."
Precisely, sir! This is the reason I use "right action" rather than the more common "righteousness" in my writings. Righteousness is reacting by rote; right action requires you to confront the moral dilema with wisdom and courage--it is always relevant to its own context.
Righteousness is a command: lying is sin, you'll go to hell.
Right Action is a story: You've hidden your Jewish next door neighbors in the cellar, and the SS comes to the door. You recognize that knock of authority; it's instinct, we all do. You are ready and willing to go to hell for lying. Willing to risk the SS being the ones who send you there. But you are also the protector of your vulnerable little family. You carefully put on your poker face and your courage, command your hand not to tremble as you reach to open the door. They tell you they're looking for the Schwartzes. You relax your stone face into a bewildered frown, blink a few times, scratch your head with your left hand as you repeat to yourself, Schwartzes, Schwartzes... "Hilda!," you cry out, raising your voice on the last syllable of her name, it's a command to reply. "Do we know any Schwartzes? They need to know."
"Oh, Dimka, Dimka," she calls back to you, "You've got the memory of a cabbage head! They came to the wrong place. Tell them to look next door."
When the US stock market was wobbling over "tariff uncertainty" earlier this year, some pundit I read tried to reassure everybody that this was merely because of FOREIGN investors selling off their holdings, no biggie, but didn't bother to explain that that might be framed as a win in a minor skirmish in the overall scheme of things, lol.
Got up this morning after a short nite's sleep, decided to take an R&R break from writing in the battle trance, and was relaxing over an article in RT when I encountered the phrase "the fiscally undisciplined countries of the EU" (without naming names), so I asked Brave search which ones correlated to that phrase. Anyway- was surprised to find Ireland also listed here among the surplus countries, and the Netherlands (one which "almost" made the undisciplined list) as well.
Thank you for recommending this article to me. BTW, I just sent a link to one of my friends in my "small" writer critique group (the man who suggested that I add a section on capital controls and financial repression to the debanking spree, etc discussion in Block 3.)
When I was at SJSU, I took 18 units of undergrad economics, thought it fascinating, LOVED Macro, but now remember very little of it except general ideas - use it or lose it, lol. My professors, liberal, (in the econ. sense, not Keynesian, I mean) were good teachers, demanding, inspiring, but I DO remember that none of them, ever, gave a presentation anywhere near as insightful, comprehensive, and well-documented as Insects.
A bit late on this comment, but I found your article fascinating. I learned a new perspective from it.
However, you don’t seem to mention all of the services that the US exports. The fact that businesses all over the world are paying Facebook for ads, Amazon for compute, and Microsoft for their office suite must balance the books somewhat.
I think your argument is that having a trade deficit of physical goods hurts the workers and communities where the factories used to be.
But balancing that against the enormous wealth of the services industry, the US is richer for it. (It’s extremely unbalanced, but that’s a different story.)
Very well written article. 2 questions - does the type of good being produced matter? (ie: China makes electronic hardware, while the US makes powerful software).
To follow on that, one of the common refrains against rebuilding US manufacturing is "people here don't want to do those jobs anyway". Does that matter?
While I agree with your overall analysis. You fail to mention that by artificially suppressing their wages these countries are essentially subsidizing the consumption of Americans. This means that Americans are able to afford more goods than they otherwise would be able to.
Therefore, I don't see how the current system is inherently detrimental to US interests. It's more of a mixed bag.
oh it's mentioned, just not in this essay. because that's not relevant to the macro framework being discussed in here regarding BOP deficits, surpluses, and tariffs.
The American system of Clay, Lincoln worked fine. Let’s give it another try. Neither Canada nor Mexico are our friends, their resentful vassals. China of course is an opponent.
You’re correct that these policies are religious. Every public policy in America is religious, it always has been.
It would incorrect to think it’s possible for trade to be granular, no more than immigration or any public policy. We are an enormous Federation, the policy must be stark, simple and enforced. Never more than now, we have been betrayed too long and traitors did too well from selling us out.
Regardless of this essay’s merits it will not age well, this world you posit will be impossible as the revelations of corruption pour forth from DOGE. Remember tomorrow is February 6th, the last day for Federal workers to take a package. How long after that does anyone think it will take for the real DOGE bombs emerge from the Treasury payments system. People will hang for the crimes of many over time.
Money and groceries are secondary to survival- or even revenge.
I appreciate the reply. I think we actually agree, we see the same problems, you just don't see how what I'm laying out is in service of fixing them.
that world you cite, the one of Clay, Lincoln, and the like: they abided by these laws of economic reality too. what I'm saying applies back then as well. in fact they understood this much better than we do, which is precisely why they didn't suffer from the same situation. they deployed the defenses I'm discussing here. balance of payments financial law: ignore it at your own peril.
these are not new concepts I'm covering. this essay is edgy the same way Nassim Taleb is when he reminds us of Black Swans or "skin in the game": these are ancient truths that modernity has simply forgotten because it thinks it knows better. it thinks it can out-engineer basic rules of accounting. some financial concepts are natural law in a similar way that gravity is. I use the term "financial physics" for a reason.
it's this kind of narrative-driven reasoning you're using, the kind I reference in the essay, that avoids the BOP reality of why we're in this situation, and allows it to persist. the labor policies of china and germany are cancerous, we must address them, it’s unequivocally wreaking havoc on us back home.
supply chains haven't left the US because USAID funds trans ballets in Ireland. Detroit is not eviscerated because of George Soros slush funds. you don't deal with the real enemy here you'll never fix anything.
that we're talking about DOGE speaks to this: it's not a serious answer to this issue. it definitely helps, however the US budget deficit is approaching 1.8 TRILLION dollars annually as of 2024, germany and china alone run over a half trillion surplus, and have created major second-order effects for us domestically. we are playing with big-boy numbers here, and need adult, mechanical solutions to rectify it. I love what Elon is doing, but exposing waste and corruption mathematically does not solve this issue.
the strategy of the Bug is a perverse one that is made easier via the efficiencies of modern technology and globalism. you do not fix Hukou manufacturing manipulations or Hartz-tier problems, the kind that have gutted your entire manufacturing sectors, with "Elon is firing a lot of bureaucrats and cutting waste" answers. the math is what it is.
and Canada and Mexico are allies in this war, the same way the USSR was with the US in WW2. does that mean they're warm-and-fuzzy friends through and through? no, of course not. but there's more serious enemies to be dealt with right now, and they are helping you in that fight. once the greater foe is taken care of, then we can deal with the more trivial matters.
oh dear indeed. getting hung up on the world "adult" and going on a series of strange tangents that have almost zero bearing on the nature of what I'm saying would typically just get ignored from me.
but since this essay is genuinely valuable for those who want to understand a real international problem and how to address it, I'll reply to this from a meta standpoint: readers who come across this comment, this is why the above is both a distraction, and more importantly allows this problem to persist with selectively curated narrative-style politicized reasoning (how basically every politician approaches it):
- no one said math people should be in charge. what a silly strawman. math doesn't tell you what you should value or work towards, but it DOES tell you when something is wrong, and whether or not your solution stands in contrast to hard reality.
here's a simple example of when you should accept military strategy from a physicist, not a general:
> "they have a nuclear weapon. if they detonate it you are going to lose if you fight a nuke with guns and grenades because *explains how nuclear fission works*
> "don't listen to this nerd! he knows not the will of man and nature of political and military strategy! we can overcome this nuke with the will to triumph and by getting better guns."
the physicist shouldn't be dictating if the war should be fought to begin with or its goals, but he does dictate, with physics, what kinetic fights can and cannot be won and with what tools. you want to take a gun to a nuke fight and feel smart about it, you go right ahead. quote all the political theorists you want, doesn't change the nature of the result and why it works that way.
what I described in the essay fits this example to a T insofar as how trade must work between parties. math. if you don't understand the basics of trade accounting and financial physics of how they *must* reconcile, you won't get this analogy.
a couple other points to show how this person is either willfully mischaracterizing the essay because he dislikes accounting, or he just doesn't understand what's going on:
>"It seems Germany is … not a friend of yours?"
that he reads personal commentary, like me liking/disliking germany personally, out of this demonstrates no capacity to internalize this essay. germany deploys a mercantilist exporting strategy, I identified it and laid it out. this is how they achieve massive surpluses, creating deficits elsewhere. sorry this accounting is distressing to you. injecting nonsense like this is a means to distract. strange there's no issue with undermining the middle class!
this is part of that "human-readable narrative" that guys like this will always insist on overlaying onto things. everything is top-down to them, they see nothing from a bottom-up environment perspective.
>north korea comments
this is a very small economy that did roughly $1B in trade or so, like 70% w china. and yes, if you undermine labor with Hartz-style actions, you will gain competitive export advantage. you could get an even greater exporting advantage with slaves! it's the same idea man!
BOP/exporting dynamics don't apply to NK? what? there is nothing even here for me to address. he's just making things up and asserting them confidently.
most people genuinely simply don't understand trade dynamics like I've laid out here. because understanding the systemic nature of the machine is hard, and having a political opinion and narrative is very easy; so we get a deluge of the latter with zero comprehension of the former.
being an adult means addressing the actual problem, not window-dressing narrative vibes. look at the size of the surpluses, look at the size of your deficit, take a look at michigan while you're at it. figure it out.
lastly, what I'm doing here isn't economics, it's accounting; there's a difference, and must economists aren't that great at it.
a comment and my reply, namely for those who see this analysis and think it's economics; it is not, this is accounting. accounting has mechanical functions, not theoretical. I hope this further illustrates:
COMMENT:
The logics is correct but please know that the only accounting identity involved is that if you account for both legs of a transaction, one positive one negative, then things will balance.
It’s about the real world, not the painting we make of it.
MY REPLY:
This comment is superficially right, but profoundly wrong in what it implies. The confusion here is treating this as if we have agency over what to account for. We do not.
The Current Account and Capital Account relationship doesn't depend on "accounting for both legs": because one leg necessarily creates the other. They're not independent variables you can manipulate separately.
When China runs a $500B trade surplus, others MUST run deficits totaling $500B. This isn't a choice or a painting, but undeniable arithmetic.
Every dollar of excess savings exported from Germany or China has to be absorbed somewhere. The US doesn't "choose" to run deficits, it's forced to when counterparties run net global surpluses. To disagree with this statement is to reveal accounting illiteracy.
The Current and Capital Accounts are dyadic: each leg defined and constrained by the other. Saying "if you account for both legs of a transaction" is a truism. It's impossible to not account for both, because one creates the other, and vice versa!
He's doing what almost all do: ascribing top-down stories to what is axiomatic at the baselayer. It's precisely this kind of thinking -- inverting causality in the process or seeing it only as mono-directional -- that causes confusion regarding tariffs, trade, and rectifying imbalances.
If you change one side of this accounting equation, you must change the other. Decrease one, you force a raise for the other. You do not need any economist "paintings" for this, only accounting. It's called a 'balance sheet' for a reason.
This becomes much clearer when you understand some elements of life always adhere to bottom-up rules, and are immune to top-down narratives about why they exist. Under certain conditions, certain traits will always exist: know the conditions, discard the stories.
Fix one side, the other side follows suit... it doesn't matter what story you tell.
Canadian friend here, I think Trump agreed with you on Canada being a friend, if not friendly (Bannon was Sloppy Steve for a bit,
Hm. The share of national income that goes to workers vs capital is roughly the same in Canada, Germany, and the US (used to be about 60% but dropping since 2000). But the share of GDP going to workers in Mexico is far, far lower, and is even lower than in China. So if domestic demand is based on worker wages and countries with lower return to their workers are net exporters bc their domestic demand is lower, Mexico should be exporting more than China, and Germany should be roughly the same as the US and Canada.
Your theory regarding domestic demand reflecting worker wages given owners of capital don't spend it all makes sense, but that doesn't seem to support that explanation for Germany being a net exporters bc their workers are paid roughly the same share of their national GDP as in the US and Canada. It really seems that in Germany's case they just must prefer saving to consuming (relatively). And how to explain how much Mexico is importing, when their workers are doing terribly as far as share of GDP?? Are they all just in tons of debt and buying on credit or something?
Labor race to the bottom is certainly apparent globally, given worker share of income is falling rapidly in every country since 2000.
I agree we should be taxing capital gains on foreign investment in the US and have a massive amount of wiggle room prior to the point we might have to worry about insufficient capital or investment flows. But frankly we should also be taxing it more domestically, since capital is taxed at only half the rate of labor, and theres no evidence that tax rates on capital have any effect whatsoever on investment rates, which have been steady at around 20% despite massively fluctuating capital gains rates historically.
These are thoughtful points. However the focus on labor share of GDP misses a crucial point about what's driving the competitive advantages and BOP outcomes.
You can end up with the same overall labor share of GDP in countries, yet still have big differences in how much each worker gets relative to their own contribution.
“What fraction of the economy goes to wages” < “What fraction of each worker’s output is returned to them”
Labor's share of national income appears similar (around 60% in the US, Canada, and Germany), but what matters is whether workers' compensation reflects their productivity. It's the productivity share of GDP that matters. having the same labor share of GDP (say, 60%) does not automatically mean each country’s workers are being compensated in line with the amount they produce. That's where the hukou and hartz systems take their toll.
Two countries could both allocate 60% of GDP to labor, yet if one country's workers are more productive and don't see wages that reflect that, they're effectively **underpaid relative to what they produce**. This results in a consumption gap, and results in an export/trade competitive advantage to the country underpaying labor relative to what it produces.
What I mentioned about harming domestic demand when you undermine the wages of labor isn't a theory, it's empirical: workers consume a much larger amount of their income than capital/the wealthy. This necessarily harms domestic consumption when you undermine their wages relative to their productivity and instead allow it to disproportionately flow to capital/the wealthy.
You then export that weak domestic demand onto other nations when you can't sell it at home.
To illustrate: on a GDP/worker basis, Chinese workers are around 20% as productive as US ones. If they earned around 20% of the wage that'd be fine and not a competitive advantage. But they don't, they earn 10-15%. This is a major difference. Another source on this: https://americancompass.org/bad-trade/
The average German worker is around 85-90% as productive as the US one, yet his wage is 75-80%. Same manipulation.
Both China and Germany have productivity-income gaps relative to the US and it allows their persistent surpluses to exist: the average Chinese worker produces about a fifth of what an American worker does, but consumes an even smaller fraction of that output. Same for Germany.
That's what encourages this toxic global race to the bottom and allows large, persistent trade imbalances (which should not consistently exist without a manipulation occurring). It's mechanical, and byproduct of industrial policies that end up impacting trade and BOP outcomes.
Thanks, I didn't realize German workers were more productive than US workers. And I guess by that same token, workers in Mexico must be much less productive, to be even lower than their share of GDP in wages?
I think a problem you have ommited is the dumping of goods, warm bodies and fentynl via México and Canada to game the trade agreements. If a friend is willing to damage you for their own gain they are no friend. Canada and México failed this metric in monumental manner.
When they act like friends we treat them as such.
The sellout/financialisation by our own elites is another aspect that was not covered. The loss of American production has made many rich.
This is a complex topic. You have an interesting perspective. I consider all of the countries pulling us down (middle class) are not on our side. México and Canada are less bad then China but they are still a net negative to the American middle class. Helping themselves while helping China that is harming us is not acceptable.
ty for reading. I didn't omit that, I addressed that in the very first paragraph: this is purely a trade analysis framework. it has nothing to do with any drug/immigration topics (unless the immigration is analyzed for its wage-suppression techniques). this is a direct analysis regarding only the balance of payments and exporting/importing dynamics.
Canada and Mexico are allies in this trade war for the simple accounting reality they make the US deficit smaller: I was pretty clear on the terms through which I see them as allies, and it's only in this way. in the ways you're describing, I agree with you, they're not friends.
think of it this way: they're allies in global trade in the same way the USSR was with the US in WW2. does that mean they're friends through and through? no, of course not. but there are more serious enemies to be dealt with right now, and they are helping you in that fight. once the greater foe is taken care of, then we can deal with the more trivial matters.
germany and china are creating your structural issues, because they are draining your supply chains with their perversions and creating your deficits in the process: the accounting is what it is, and globalism demonstrates this. they're why detroit is gone, and why supply chains have left. you deal with them to fix your real problems.
The logic of your analysis isn't wrong, but it's not what happens in the real world.
So for instance, your logic would make sense if the following were true:
- Gold standard for balance of payments
- Centralized economies (the state)
- The need for an end of year accounting at the country level.
Following your logic we'd expect capital flows between surplus countries (ex. China, Germany pre-22) to offset current account deficits (ex. USA).
But this isn't necessarily the case. Surplus countries can hoard savings, invest domestically, exchange Fiat currency for assets and monetary equivalents (ex. Precious metals).
The great misconception even academia gets wrong is the US current account deficit doesn't matter so long as private banks are willing to create liquidity and the US government is willing to issue new debt and USD maintains its role as a medium for value exchange. Worst case scenario the US and EU will lock into each other's debt spiral. The private banks hold the ultimate rotten apple, but they're happy to pretend it's edible so long as the governments are willing to provide the backstop as lender of last resort.
Consider that the academic literature (and simplistic macro models make sense) continues to pretend we live in a world where capital is limited (by Gold for example). Whereas this is not the case today. Today everything is a fubar Alice in Wonderland simulation (read RA Werner "How banks create money..." if you haven't already, it's about how capital flows work in the real world)
You can test this by applying the same logic you use. Take China and the USA. China runs persistent current account surpluses with the USA, but it does not run capital account deficits. At one point (decades ago) it purchased USD treasuries, although lately it's trimming it's holdings (Geopolitics and Russia's 300bn etc). For your logic to be true, we would have to see Capital flows, either directly or indirectly, between China and the USA in the order of magnitude of 500bn a year, either into USD treasuries (govt debt) or financial markets (private). But we do not.
If you read Werner it'll make more sense.
The whole issue of current and capital accounts makes sense in a zero sum game where even if we create a map of 2 or 200 or 2m entities, the algebraic sum of surpluses and deficits must equal 0. But this hasn't been the case since '71 (USA) and the 30s (Europe).
This is what Russia and China are orchestrating through BRICS. A return to some kind of standard (a mix of commodities would be the best possible outcome). In this scenario what you're trying to argument makes sense.
important emphasis: you do not at all need a gold standard. this is accounting. and it is precisely what happens in the real world.
everything you just said sums to "if it's a soft currency then BOP laws of accounting don't apply" (you didn't need to cite gold, you could have just said "hard currency"): this is *critically* wrong. all it does is change the calculus of default and ability to sustain a deficit. it changes literally nothing about the accounting and what sustained deficits/surpluses do to currencies and inflation.
I need to state that emphatically: this is accounting, not economics, that applies to hard or soft currencies. it is not a model, it is not logic, it is how balance sheets *must* sum. this is not at all based on "The need for an end of year accounting at the country level"; this is a non-sequitar. it's like if a country or company pretended they didn't have a balance sheet then it just goes away.
--> all a hard currency does is limit the degree of deficit you can print; the accounting does not change. it is only a governor on spending. <--
regarding my intimate familiarity with how soft currencies work, see here: (Werner would approve): https://thedosagemakesitso.substack.com/p/wartime-fiscal-policy
your focus on capital and printing is distracting from your ability to see what's being said in this essay.
regarding the axiomatic nature of accounting (not logic, not a model), see here: https://substack.com/@dosagemakesitso/note/c-151223921.
and yes, surplus countries must create deficits in other countries by necessity; global trade and capital accounts sum to zero. trade is a global system; if china had a $500B surplus, other countries will have deficits summing to an equal amount.
I am familiar with Werner, I like him in fact. there is nothing in here regarding BOP accounting and trade balances that he contradicts, or that contradicts him. he understands monetary plumbing very well, however that is a completely different conversation than trade. nowhere did I say there was a risk of hard default here.
you are overlaying macro stories about soft currencies as if they are exempt from basic tenets of trade; this essay applies every bit to hard and soft fiat.
Alright. I'm just trying to say accounting rules don't apply. So long as the USD is the global reserve currency AND there is no standard other than the USD Fiat ("soft currency" in your description), then the current account deficits don't matter in relation to the capital accounts, the transmission mechanism is broken. I'm not saying that what you're saying is wrong, I'm saying it doesn't matter.
For instance, if it mattered, the US in some way would have to stabilize it's capital accounts to match it's current account. It could issue new debt to international "investors" or it could point to matching private transnational capital inflows (into assets). But it doesn't. So then analysts (like you) zoom out and say, well internationally the algebraic sum of the balance of payments must even out (so deficits in country A offset by surplus in country B). This is partly true for everyone who is not the USA and Europe (and Canada, Australia and NZ).
If you really want to get into the weeds of the issue, it's further complicated by how we measure GDP.
All this confusion helps to maintain the current arrangement. The short answer is Power demands it to be so, because it sets the dosage (sorry, couldn't help myself).
By way of analogy, it's the same with banks and Werner. If you ask an NPC on the street how banks work, what are central banks, who controls money supply, etc, they'll give you wrong answers. Even academia can't help because they don't really know (mostly, although people have been waking up slowly, etc). But all this confusion helps maintain the status quo.
It's the same with the macro picture. The numbers don't add up. But they don't add up because they're not meant to add up. If a single country (ex. Mexico or Thailand) is short on dollars, their currency devaluates. Their only escape are current account surplus (exports) and/or capital account surplus (FDI and inflows). Meanwhile for the USA it doesn't matter. The US Fed and Treasury is not an international bank. The international banks are all private, and if a country doesn't give them carrots then the US govt uses a stick. I'm summarily generalizing, but that's how it works. Using the example, if Mexico or Thailand need USD they get them from private banks who are intermediaries.
If you know about eurodollars then you'll know that certain European banks have the privilege of printing dollars. Like others have said, it's a small club and we ain't in it.
Stefano, view this reply as something useful to you that you should not argue with that will help you understand something you clearly do not. you've made several disqualifying errors that reveal you don't understand the basic mechanics of trade. and that you think "soft currency" is my personal terminology (it's standard econ vocabulary distinguishing fiat from commodity-backed/pegged currencies, close to impossible to not encounter in this field) already signals the problem.
you keep repeating two fundamentally wrong claims: that accounting identities only apply to hard currencies (false), and that reserve currency status means sustained deficits don't matter indefinitely (false). reserve status merely extends the timeline before consequences manifest. that's it. you can dress up whatever macro storytelling you want on top of it (of which you are doing a lot) and it does not change this reality.
we cannot just make things up, say them, and make them so. I am not sharing a spreadsheet understanding, but a functional "real life how shit works" one.
for those reading, the following statements are patently incorrect. if you found this essay and are trying to learn it's important to understand why:
-"if it mattered, the US in some way would have to stabilize it's capital accounts to match it's current account. It could issue new debt to international "investors" or it could point to matching private transnational capital inflows (into assets). But it doesn't. " "The numbers don't add up. But they don't add up because they're not meant to add up. "
you are just making things up; you must stop doing this. allowing anyone to go on thinking this falsehood is a disservice to them. yes, the numbers do add up (stabilize? that is not an applicable word) because they must; because the basic flows of cross-border finance necessitate these dual entries. the only way they wouldn't add up would be to *lie about them or conceal them*. hard or soft currency, it doesn't matter.
when you say the capital and current accounts of the US, or anyone, are "not meant to add up" - this is financially illiterate. the current account and capital (financial) account MUST sum to zero by definition and it does matter. this isn't ideology or theory, it's an accounting identity as fundamental as assets = liabilities + equity.
as capital flows in, it will create deficits; as deficits occur, capital must flow in. these are a dyadic relationship of BOP accounting and the nature of trade.
look to the BEA, FRED, the IMF, whatever data source you want: the current and capital (financial + capital) sum to zero, and any deviations are transient and/or clerical (eg. timing delays, valuation methods, etc.).
you cannot escape the laws of accounting (and inflation!) by sticking your head in the sand and pretending it's not there.
-"I'm just trying to say accounting rules don't apply." "So then analysts (like you) zoom out and say, well internationally the algebraic sum of the balance of payments must even out (so deficits in country A offset by surplus in country B). This is partly true for everyone who is not the USA and Europe (and Canada, Australia and NZ)."
"accounting rules don't apply" to the US/Europe/etc. is again just saying things. every country faces the same iron law: sustained current account deficits require sustained capital inflows. the only difference with reserve currencies is the duration and magnitude they can sustain before adjustment becomes forced.
further, this isn't some kind of wonk "algebraic" stuff, it is basic arithmetic.
you will not be able to escape how these relationships must balance and create dislocations when sustained for too long and too great, no matter how many stories you insert. massive deficits cannot go on forever (this should be self-evident) no matter the printer, and saying "reserve currency" (an unofficial designation that in practice just means "schelling point fiat for commerce") changes nothing except to say 'the deficits can be larger for longer'.
trying to inject eurodollars, Werner (who is a monetary guy not a trade one), and GDP calculations into this illustrates you do not grasp the trade-specific concepts here. these are all distractions for the topic at hand.
I spend the time laying this out both for others to understand and to help someone in a way that I myself would want to be helped. spend more time on this subject. broaden who you read. Werner is great but mostly inapplicable here, study trade guys like Micheal Pettis, it will help significantly.
To clarify, this is the privilege of the USD being the financial system's reserve currency. There's no actual accounting about how many USD are in circulation (ex. Eurodollar) because it's a make believe simulation where everyone pretends the Fiat currency is a store of value. In a unipolar world this works.
At the moment because of the mountains of debt and liabilities (ex. Think derivatives) that have been created, it's in no ones interest to say the emperor is naked.
A good indicator of the current mess is the price of gold in USD. Gold is a good indicator because of what it represents in the history of money, commerce, BOP, etc.
Another good concept to keep in mind is bullshit jobs. Academia and economists and journalists and all the industries involved, need to justify their paychecks, every month. So content must be created and the more noise there is the easier it is to pretend that the simulation is really important and real.
all the reserve currency means is "there is a ton of demand for dollars and you can get away with deficits for a long time because of this huge demand for USD". it changes nothing about this essay and accounting. it only speaks to why the US has in fact been able to get away with this for as long as it has with little inflation (which is byproduct of reserve-status demand, yes).
I am extremely familiar with the eurodollar market. historically so. as in they used to be called Continental Dollars in the 1950s before they really started to develop.
https://thedosagemakesitso.substack.com/p/wartime-fiscal-policy
It means a lot more than only that. What you're partially saying is it means one needs to purchase the equivalent USD of the goods and services for every transnational transaction, but what it by default also means is one's currency (and wealth) is and can only be measured in relation to the USD.
This means there's no need for accounting equilibrium on the USD production side.
What it doesn't mean is that supply is infinite. But as long as USD are circulating in the USA consumption based economy, and there is international demand for USD outside the USA, there is no need for an equilibrium between capital and current accounts. The current account bleeds. Ok, so what? It doesn't matter. This bleeding is absorbed by GDP growth outside the USA as this growth is always measured in USD. Global trade between South America, Africa and Asia is measured in USD. USD wins by doing nothing. This is what BRICS is trying to change.
Take a funny curious example. Before Ukraine-'22 circa 15% of global trade was in Euros, then it disappears overnight and returns to USD. Just like that, magic. No trade disruption, no financial crash, no devaluation. What happened?
- "This means there's no need for accounting equilibrium on the USD production side."
I never said deficits (disequilibrium) are inherently bad and can't happen. deficits are fine, good even, so long as there is no underlying manipulation creating them. the focus here is on sustained ones. and the accounting, and negative eventual effects, all still apply. you are tugging this conversation into one of curated macro stories instead of the mechanical, technical accounting substance that it is using to demonstrate how underhanded trade manipulations happen.
the answer for how long these can go on is not "forever"; this should be self-evident.
- "there is international demand for USD outside the USA, there is no need for an equilibrium between capital and current accounts. "
yes, and the answer to this is not "infinity demand". there absolutely is eventually a need to bring that back to equilibrium. the entire basis of your reasoning cannot be "reserve currency makes it a bottomless pit we can get away with this forever". no, you cannot. you are beginning to suffer the consequences already by way of what it's doing to your industrial base. the currency issues will eventually come to roost too.
no amount of "it's a soft currency and reserve currency so that means it has way way more demand" (this is the crux of what's being said) changes the points here. it just means you can get away with deficits for way longer than normal. that's it.
The short reply is it's all part of the plan and we are still figuring out what that plan is. Whatever the plan is we won't get priority seating.
Yeah I agree it can't go on forever and there's a limit to the manipulation. I'm implying Power throws the accounting rules in the dustbin because at the end of the cycle we're going through what will matter is asset ownership (not beneficiary) and not its value per se (Everyone with just value and no assets will take a big haircut). This cycle has played out many times before.
I don't know, I'm not sure equilibrium is necessary. You're assuming the last play of the game necessitates Power getting a haircut, I'm assuming Power will aim to sweep the table. Yes we're already in the endgame territory so like we both say (maybe for different reasons, but it doesn't matter), it's not infinite potential debt. And yes eventually the chickens come home to roost.
But don't assume we're all in this together and everyone is equal or treated the same. We don't live in a perfect world, we both should agree on this.
A separate bunny trail:
"You are in the domain of religion, not economic thought, if you think an action is always good, and the other always bad. The real answer is always… it depends."
Precisely, sir! This is the reason I use "right action" rather than the more common "righteousness" in my writings. Righteousness is reacting by rote; right action requires you to confront the moral dilema with wisdom and courage--it is always relevant to its own context.
Righteousness is a command: lying is sin, you'll go to hell.
Right Action is a story: You've hidden your Jewish next door neighbors in the cellar, and the SS comes to the door. You recognize that knock of authority; it's instinct, we all do. You are ready and willing to go to hell for lying. Willing to risk the SS being the ones who send you there. But you are also the protector of your vulnerable little family. You carefully put on your poker face and your courage, command your hand not to tremble as you reach to open the door. They tell you they're looking for the Schwartzes. You relax your stone face into a bewildered frown, blink a few times, scratch your head with your left hand as you repeat to yourself, Schwartzes, Schwartzes... "Hilda!," you cry out, raising your voice on the last syllable of her name, it's a command to reply. "Do we know any Schwartzes? They need to know."
"Oh, Dimka, Dimka," she calls back to you, "You've got the memory of a cabbage head! They came to the wrong place. Tell them to look next door."
When the US stock market was wobbling over "tariff uncertainty" earlier this year, some pundit I read tried to reassure everybody that this was merely because of FOREIGN investors selling off their holdings, no biggie, but didn't bother to explain that that might be framed as a win in a minor skirmish in the overall scheme of things, lol.
Got up this morning after a short nite's sleep, decided to take an R&R break from writing in the battle trance, and was relaxing over an article in RT when I encountered the phrase "the fiscally undisciplined countries of the EU" (without naming names), so I asked Brave search which ones correlated to that phrase. Anyway- was surprised to find Ireland also listed here among the surplus countries, and the Netherlands (one which "almost" made the undisciplined list) as well.
Thank you for recommending this article to me. BTW, I just sent a link to one of my friends in my "small" writer critique group (the man who suggested that I add a section on capital controls and financial repression to the debanking spree, etc discussion in Block 3.)
When I was at SJSU, I took 18 units of undergrad economics, thought it fascinating, LOVED Macro, but now remember very little of it except general ideas - use it or lose it, lol. My professors, liberal, (in the econ. sense, not Keynesian, I mean) were good teachers, demanding, inspiring, but I DO remember that none of them, ever, gave a presentation anywhere near as insightful, comprehensive, and well-documented as Insects.
A bit late on this comment, but I found your article fascinating. I learned a new perspective from it.
However, you don’t seem to mention all of the services that the US exports. The fact that businesses all over the world are paying Facebook for ads, Amazon for compute, and Microsoft for their office suite must balance the books somewhat.
I think your argument is that having a trade deficit of physical goods hurts the workers and communities where the factories used to be.
But balancing that against the enormous wealth of the services industry, the US is richer for it. (It’s extremely unbalanced, but that’s a different story.)
Very well written article. 2 questions - does the type of good being produced matter? (ie: China makes electronic hardware, while the US makes powerful software).
To follow on that, one of the common refrains against rebuilding US manufacturing is "people here don't want to do those jobs anyway". Does that matter?
While I agree with your overall analysis. You fail to mention that by artificially suppressing their wages these countries are essentially subsidizing the consumption of Americans. This means that Americans are able to afford more goods than they otherwise would be able to.
Therefore, I don't see how the current system is inherently detrimental to US interests. It's more of a mixed bag.
oh it's mentioned, just not in this essay. because that's not relevant to the macro framework being discussed in here regarding BOP deficits, surpluses, and tariffs.
it warrants its own essay: https://thedosagemakesitso.substack.com/p/mid-range-jumpers-for-the-middle
in fact, maybe two of them: https://thedosagemakesitso.substack.com/p/touching-soul-touching-senses-the
The American system of Clay, Lincoln worked fine. Let’s give it another try. Neither Canada nor Mexico are our friends, their resentful vassals. China of course is an opponent.
You’re correct that these policies are religious. Every public policy in America is religious, it always has been.
It would incorrect to think it’s possible for trade to be granular, no more than immigration or any public policy. We are an enormous Federation, the policy must be stark, simple and enforced. Never more than now, we have been betrayed too long and traitors did too well from selling us out.
Regardless of this essay’s merits it will not age well, this world you posit will be impossible as the revelations of corruption pour forth from DOGE. Remember tomorrow is February 6th, the last day for Federal workers to take a package. How long after that does anyone think it will take for the real DOGE bombs emerge from the Treasury payments system. People will hang for the crimes of many over time.
Money and groceries are secondary to survival- or even revenge.
I appreciate the reply. I think we actually agree, we see the same problems, you just don't see how what I'm laying out is in service of fixing them.
that world you cite, the one of Clay, Lincoln, and the like: they abided by these laws of economic reality too. what I'm saying applies back then as well. in fact they understood this much better than we do, which is precisely why they didn't suffer from the same situation. they deployed the defenses I'm discussing here. balance of payments financial law: ignore it at your own peril.
these are not new concepts I'm covering. this essay is edgy the same way Nassim Taleb is when he reminds us of Black Swans or "skin in the game": these are ancient truths that modernity has simply forgotten because it thinks it knows better. it thinks it can out-engineer basic rules of accounting. some financial concepts are natural law in a similar way that gravity is. I use the term "financial physics" for a reason.
it's this kind of narrative-driven reasoning you're using, the kind I reference in the essay, that avoids the BOP reality of why we're in this situation, and allows it to persist. the labor policies of china and germany are cancerous, we must address them, it’s unequivocally wreaking havoc on us back home.
supply chains haven't left the US because USAID funds trans ballets in Ireland. Detroit is not eviscerated because of George Soros slush funds. you don't deal with the real enemy here you'll never fix anything.
that we're talking about DOGE speaks to this: it's not a serious answer to this issue. it definitely helps, however the US budget deficit is approaching 1.8 TRILLION dollars annually as of 2024, germany and china alone run over a half trillion surplus, and have created major second-order effects for us domestically. we are playing with big-boy numbers here, and need adult, mechanical solutions to rectify it. I love what Elon is doing, but exposing waste and corruption mathematically does not solve this issue.
the strategy of the Bug is a perverse one that is made easier via the efficiencies of modern technology and globalism. you do not fix Hukou manufacturing manipulations or Hartz-tier problems, the kind that have gutted your entire manufacturing sectors, with "Elon is firing a lot of bureaucrats and cutting waste" answers. the math is what it is.
firing gov employees doesn't bring supply chains back home. tariffing canada doesn't either.
and Canada and Mexico are allies in this war, the same way the USSR was with the US in WW2. does that mean they're warm-and-fuzzy friends through and through? no, of course not. but there's more serious enemies to be dealt with right now, and they are helping you in that fight. once the greater foe is taken care of, then we can deal with the more trivial matters.
oh dear indeed. getting hung up on the world "adult" and going on a series of strange tangents that have almost zero bearing on the nature of what I'm saying would typically just get ignored from me.
but since this essay is genuinely valuable for those who want to understand a real international problem and how to address it, I'll reply to this from a meta standpoint: readers who come across this comment, this is why the above is both a distraction, and more importantly allows this problem to persist with selectively curated narrative-style politicized reasoning (how basically every politician approaches it):
- no one said math people should be in charge. what a silly strawman. math doesn't tell you what you should value or work towards, but it DOES tell you when something is wrong, and whether or not your solution stands in contrast to hard reality.
here's a simple example of when you should accept military strategy from a physicist, not a general:
> "they have a nuclear weapon. if they detonate it you are going to lose if you fight a nuke with guns and grenades because *explains how nuclear fission works*
> "don't listen to this nerd! he knows not the will of man and nature of political and military strategy! we can overcome this nuke with the will to triumph and by getting better guns."
the physicist shouldn't be dictating if the war should be fought to begin with or its goals, but he does dictate, with physics, what kinetic fights can and cannot be won and with what tools. you want to take a gun to a nuke fight and feel smart about it, you go right ahead. quote all the political theorists you want, doesn't change the nature of the result and why it works that way.
what I described in the essay fits this example to a T insofar as how trade must work between parties. math. if you don't understand the basics of trade accounting and financial physics of how they *must* reconcile, you won't get this analogy.
a couple other points to show how this person is either willfully mischaracterizing the essay because he dislikes accounting, or he just doesn't understand what's going on:
>"It seems Germany is … not a friend of yours?"
that he reads personal commentary, like me liking/disliking germany personally, out of this demonstrates no capacity to internalize this essay. germany deploys a mercantilist exporting strategy, I identified it and laid it out. this is how they achieve massive surpluses, creating deficits elsewhere. sorry this accounting is distressing to you. injecting nonsense like this is a means to distract. strange there's no issue with undermining the middle class!
this is part of that "human-readable narrative" that guys like this will always insist on overlaying onto things. everything is top-down to them, they see nothing from a bottom-up environment perspective.
>north korea comments
this is a very small economy that did roughly $1B in trade or so, like 70% w china. and yes, if you undermine labor with Hartz-style actions, you will gain competitive export advantage. you could get an even greater exporting advantage with slaves! it's the same idea man!
BOP/exporting dynamics don't apply to NK? what? there is nothing even here for me to address. he's just making things up and asserting them confidently.
most people genuinely simply don't understand trade dynamics like I've laid out here. because understanding the systemic nature of the machine is hard, and having a political opinion and narrative is very easy; so we get a deluge of the latter with zero comprehension of the former.
being an adult means addressing the actual problem, not window-dressing narrative vibes. look at the size of the surpluses, look at the size of your deficit, take a look at michigan while you're at it. figure it out.
lastly, what I'm doing here isn't economics, it's accounting; there's a difference, and must economists aren't that great at it.