Monday, September 1, 2008


(Week 6 - Monday Sept. 1)

The "balance of trade deficit" is a net outflow of money caused by this country buying more goods from foreign nations than we sell. Like the Federal "deficit" and "debt," it has its root in the private-bank-loan transaction by which our money is created, but to trace out how it works takes a longer explanation. The reader is urged to follow this thread of thought carefully.

The "interest" payments that must be continuously made in order to maintain a money supply borrowed from a private banking system cause, from the perspective of the consumer, a net loss of purchasing power, because he does not receive anything of value in exchange for it. The result is that not all the money that is paid to people who produce the goods in the domestic economy shows up as buying power on the consumer side of the production-balances-consumption market equation (I am using a very broad definition of "goods" here that includes all goods and services).

This causes goods to pile up as unsold inventory in the marketplace, which means that orders for more goods will decrease and workers will be laid off. Those still employed will experience the same cycle of having part of the money from their paychecks being siphoned off for "interest" payments, which, in turn, causes a deficiency of purchasing power, that results in still more goods piling up as unsold inventory, even at the reduced rate of production. More workers will be laid off. If this vicious cycle is allowed to continue unchecked, the country will enter an economic "recession," or even "depression."

This winding down of the physical economy parallels the contraction of the money supply described in previous columns, both of which are the result of the requirement to make "interest" payments on the private bank loans.

The apparent answer to both the physical and financial shortfalls would seem to be the same; that is, find a way to bring more money into the circulation. The option that has been talked about in these columns so far (short of making the transition to a public monetary system) is for masses of people to borrow ever greater quantities of money into circulation from the banking system. There is, however, one other possibility that I have not yet talked about; that is, achieve a "positive trade balance" with other nations.

One way that unsold inventory piling up in the domestic marketplace can be disposed of is to sell it to foreigners. What is more, such sales would bring money into the domestic money supply that has been lost to "interest" charges. It looks like a win-win solution, except for one factor. That is that virtually all other currencies around the world are also borrowed into existence from private banks, so the domestic economy of every other nation exhibits the same problem, and, therefore, the same need for a "positive trade balance."

Ideally, world trade is a zero-sum game. Everyone can't have a "positive trade balance" with everyone else. The "positive balances" must of a mathematical certainty equal the "negative balances." For the last few decades, the U.S. has been losing in the balance-of-trade competition. Therefore it has been running up a huge "balance of trade deficit" that can only be made up for by taking on more "debt," particularly in the form of the selling of bonds backing the "Federal debt" to other nations.

We have gotten away with this so far because the U.S. dollar is the "reserved currency" for the world. This means that it is the currency that every other nation has to hold a quantity of to back up their own currency (which is why it is sometimes called "paper gold"), as well as insure their own buying power in the international marketplace (e.g. trade for oil is conducted only in dollars).

If the dollar became publicly-issued, the rest of the world's currencies would be obliged to follow suit and become publicly-issued as well. If that happened, the people of every nation would have the ability to redeem the full value of everything they produced in their own domestic marketplace, because to maintain their money supply they would no longer be losing the buying power that is currently leaking away due to having to pay "interest" to the banks.

What is more, it would also be possible to calculate an equitable trading value for every currency in the world such that balance of trade surpluses and deficits would disappear. All trade is essentially goods-for-goods, and there is no reason why that could not be reflected in equitable exchange rates between the currencies that facilitate their exchange.

What stops this equitable exchange from happening now is the "debt" that attends the creation of all major currencies, and renders any hope for a just, stable and sustainable world impossible. This opens up a whole new area of discourse that there is not room to do justice to here (will be explored in future columns), but I hope it gives the reader at least a glimpse of what is possible if we were to return to sound monetary practices.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites:

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