Today’s Financial Times articles: Obama toughens China line (Jan 20, 2011), A Strategy to Straddle the Planet (Jan 17, 2011)
Everyone knows that China sells more to the rest of the world than it buys, and that the US buys more from the rest of the world than it sells. All the debate is about what these facts mean, where they come from and where they are going.
Perhaps the dominant view, at least in political circles, is that the above stated facts are a Problem, and that the Solution is for China to buy more of our stuff. Just so, the article quotes President Obama addressing President Hu Jintao: “We want to sell you all kinds of stuff. We want to sell you planes, we want to sell you cars, we want to sell you software.”
Let’s look at the same facts instead from a money view perspective.
The place to start is to think of the facts as statements about flows of cash, not flows of goods. Here is how Hyman Minsky put it, in his 1986 book Stabilizing an Unstable Economy:
To analyze how financial commitments affect the economy it is necessary to look at economic units in terms of their cash flows. The cash-flow approach looks at all units—be they households, corporations, state and municipal governments, or even national governments—as if they were banks. (p. 198)
This way of thinking has deep roots in American economic thought, going back to the institutionalist school of Wesley Clair Mitchell and especially Morris Copeland.
Copeland’s 1952 Study of Moneyflows in the United States is the origin of what we know today as the Flow of Funds Accounts which are published quarterly by the Federal Reserve Board. The original book, however, was an attempt to propose a framework for macroeconomic analysis alternative to the National Income and Product Accounts which served as the basis for Keynesian macroeconomics.
From a moneyflow perspective, every source of funds has a corresponding use, and vice versa. China’s trade surplus is a source of funds that, as a matter of accounting logic, has only three possible uses: accumulation of financial assets, paydown of financial liabilities, or hoarding of money. The U.S. trade deficit is a use of funds that, as a matter of accounting logic, has only three possible sources: decumulation of financial assets, increase of financial liabilities, or dishoarding of money.
(When we talk about countries hoarding and dishoarding of money, we are of course talking about international reserves, and that is a potential cause of confusion because of the international reserve function of the U.S. dollar. Hold that thought for the moment.)
The real power of the moneyflow framework comes not so much from understanding all units as if they were banks, but rather from understanding the relations between the units and the operations of the system as a whole. From a moneyflow perspective, one unit’s source of funds in another unit’s use, and vice versa. If China and the US were the only countries in the world, China’s accumulation of financial assets would, as a matter of accounting logic, be the counterpart of US decumulation of financial assets or borrowing.
The point is that the counterpart of a bilateral flow of funds one way on goods and services account must be a bilateral flow of funds the other way on the financial account. The US must, as a matter of accounting logic, be selling “stuff” to China equal in value to the “stuff” it is buying, but it is financial stuff the US is selling, not current goods and services. The US is selling claims of one sort or another on the future cash flows of the US.
What kind of claims are we talking about? Ownership claims to US land, buildings, companies? Or fixed income promises to pay? To ask the question is to reveal the unspoken subtext of the entire trade debate. President Obama says, “we want to sell you all kinds of stuff”, but his examples are all only one kind of stuff, current goods and services, not future goods and services.
China and the US are of course not the only countries in the world, and that makes a difference. China’s use of funds must be someone’s source of funds, but that someone need not be the US. The US source of funds must be someone’s use of funds, but that someone need not be China. In this respect, the moneyflow perspective suggests thinking of the rest of the world as a financial intermediary, at least potentially, taking in cash flow from China on the one hand and pouring out cash flow to the US on the other hand.
The point is this. The US must, as a matter of accounting logic, be selling stuff (including financial stuff) to the rest of the world (including China) equal in value to the stuff it is buying. The trade debate is not fundamentally about current goods and services at all. It is about the fabric of promises to pay in the future; it is about who is making commitments to who, and to do what, in the future.