6.2 Foolishness of running trade surpluses
If some country is thinking that having recurring trade surplus is a good thing, they are heavily mistaken. Even if such strategy solves the inefficient buying power at home from short term perspective, at long term it is fools gold, only imaginary money which will evaporate to smoke when demands of repayment are made or immediately, after such strategy is abandoned.
Why it is so ?
- In first step, exporters deposit their money in the bank of their choosing, which they trust. Why not ?
- Bank lends their money to government of country, which wants to import. This means the originally deposited money is no longer there, and is replaced by loan, which acts as Asset. It is important, as assets have their value and therefor can act as collateral against bank´s liability (which is money, they have from their depositors) and which they promised ( hence liability) to repay at demand.
- The government distributes the borrowed money to its citizens through various programs. That way the importing state occurs debt and spends the money. It not longer has the money it received, its citizens have it.
- The people of importing state buy what they need from import, as their buying power is boosted from state money.
Now the money from loan definitely leaves the importing state, not its government neither its people have it. It moves BACK to exporters. - Now the exporters deposit the money from their business activities again into their banks.
Now they BELIEVE, that they have there 2 sets of monies: 1) original deposit
2) newly acquired profits
But, it reality in their bank their money is represented by:
1) original money, which came all way back through bank loan, state redistribution policy, consumption and final payment
2) Liability of the bank backed by it´s newly acquired assed – loan to importing state government.
If the exporters wanted at that moment to withdraw both sets of money, the bank would have to ask for cash from another bank based on selling their asset – loan to importing government. It case the government would be solid and there would be no doubts about its ability to repay, that would be no problem.
6. The circle of loan and exports repeats, and at the end the exporting business believe they have 3 sets of money, while in reality it is represented by only 1 real money and 2 sets of liabilities, backed by foreign loan. It is important to realize, that the government of importing country nor the people of importing country themselves don´t have the money in question, they moved the one and only real set of money in circulation back to exporters whenever they paid for the goods they bought.
7. After 3 cycles, the importing country government is running the debt o 3 sets of money, equal of profit which exporters believe they gained.
Now the banks say they want their loans back !
Well, it is going to be a real problem as the one and only set of money which was changing hands WAS already returned to them as deposited profits of their exporters. The importing state government don´t have any money. Their citizens don´t have it either.
The loans equal to profits, in line with this economic theory.
If the banks that provided the money is able to sell some or all of its assets, it is OK. Otherwise it is bankrupt.
As the government of importing state is not able to repay ( clearly, they have nothing to repay it from) and after the prolonged period of trying ( austerity,...) they ask for partial debt write-off.