WEBVTT NOTE 11.10. Balances of Payments 1 00:00:00.000 --> 00:00:04.520 10. Balances of Payments 2 00:00:04.520 --> 00:00:11.340 In Chapter 3, we engaged in an extensive analysis of the individual's balance of payments. We 3 00:00:11.340 --> 00:00:18.100 saw there that an individual's income can be called his exports, and the physical sources 4 00:00:18.100 --> 00:00:25.760 of his income, his goods exported, while his expenditures can be termed his imports, and 5 00:00:25.760 --> 00:00:36.760 To say that exports pay for imports is simply to say that income pays for expenditures. 6 00:00:36.760 --> 00:00:43.620 We also saw that it is nonsensical to call a man's balance of trade favorable if he chooses 7 00:00:43.620 --> 00:00:51.400 to use some of his income to add to his cash balance, or unfavorable if he decides to draw 8 00:00:51.400 --> 00:00:57.480 Draw Down His Cash Balance, so that expenditures are greater than income. 9 00:00:57.480 --> 00:01:03.400 Every action and exchange is favorable from the point of view of the person performing 10 00:01:03.400 --> 00:01:08.720 the action or exchange, otherwise he would not have engaged in it. 11 00:01:08.720 --> 00:01:15.880 A further conclusion is that there is no need for anyone to worry about anyone else's balance 12 00:01:15.880 --> 00:01:17.680 of trade. 13 00:01:17.680 --> 00:01:25.740 A person's income and expenditure constitute his balance of trade, while his credit transactions, 14 00:01:25.740 --> 00:01:30.660 added to this balance, comprise his balance of payment. 15 00:01:30.660 --> 00:01:36.420 Credit transactions may complicate the balance, but they do not alter its essentials. 16 00:01:36.420 --> 00:01:43.340 When a creditor makes a loan, he adds to his money paid column to the extent of the loan, 17 00:01:43.340 --> 00:01:46.840 for purchase of a promise to pay in the future. 18 00:01:46.840 --> 00:01:52.960 He has purchased the debtor's promise to pay in exchange for transferring part of his 19 00:01:52.960 --> 00:01:56.360 present cash balance to the debtor. 20 00:01:56.360 --> 00:02:04.080 The debtor adds to his money receipts column from the sale of a promise to pay in the future. 21 00:02:04.080 --> 00:02:10.640 These promises to pay may fall due at any future date decided upon by the creditor and 22 00:02:10.640 --> 00:02:11.640 the debtor. 23 00:02:11.640 --> 00:02:15.520 Generally, they range from a day to many years. 24 00:02:15.520 --> 00:02:21.740 From that date, the debtor repays the loan and transfers part of his cash balance to 25 00:02:21.740 --> 00:02:23.320 the creditor. 26 00:02:23.320 --> 00:02:30.880 This will appear in the debtor's money-paid column for repayment of debt, and in the creditor's 27 00:02:30.880 --> 00:02:35.420 money-received column from repayment of debt. 28 00:02:35.420 --> 00:02:40.400 Interest payments made by the debtor to the creditor will be similarly reflected in the 29 00:02:40.400 --> 00:02:44.020 respective balances of payments. 30 00:02:44.020 --> 00:02:49.380 More nonsense has been written about balances of payments than about virtually any other 31 00:02:49.380 --> 00:02:51.700 aspect of economics. 32 00:02:51.700 --> 00:02:58.820 This has been caused by the failure of economists to ground and build their analysis on individual 33 00:02:58.820 --> 00:03:01.580 balances of payments. 34 00:03:01.580 --> 00:03:10.220 Instead they have employed such, the National Balance of Payments without basing them on 35 00:03:10.220 --> 00:03:14.220 on Individual Actions and Balances 36 00:03:14.220 --> 00:03:22.220 Balances of payments may be consolidated for many individuals, and any number of groupings may be made. 37 00:03:22.220 --> 00:03:33.220 In these cases, the balances of payments only record the monetary transactions between individuals of the group and other individuals, 38 00:03:33.220 --> 00:03:39.220 but fail to record the exchanges of individuals within the group. 39 00:03:39.220 --> 00:03:49.220 For example, suppose that we take the consolidated balance of payments for the Antlers Lodge of Jonesville for a certain period of time. 40 00:03:49.220 --> 00:03:54.220 There are three lodge members, A, B and C. 41 00:03:54.220 --> 00:04:03.220 In the consolidated balance sheet of the Antlers Lodge, the money payments between the members must, of necessity, cancel out. 42 00:04:03.220 --> 00:04:31.220 Thus, consolidated balance of payments for Antler's Lodge shows money income from outsiders, exports, 75 ounces, reduction of cash balance for transfer to outsiders, 3 ounces, for a total of 78 ounces, compared with money expenditure on goods to outsiders, imports, 78 ounces. 43 00:04:31.220 --> 00:04:44.220 The consolidated balance tells less about the activities of the members of the group than do the individual balances, since the exchanges within the group are not revealed. 44 00:04:44.220 --> 00:04:51.220 This discrepancy grows as the number of people grouped in the consolidated balance increases. 45 00:04:51.220 --> 00:05:06.220 The consolidated balance of the citizens of a large nation such as the United States conveys less information about their economic activities than is revealed by the consolidated balance of the citizens of Cuba. 46 00:05:06.220 --> 00:05:17.220 Finally, if we lump together all the citizens of the world engaged in exchange, their consolidated balance of payments is precisely zero. 47 00:05:17.220 --> 00:05:27.220 All the exchanges are internal within the group, and the consolidated balance conveys no information whatever about them. 48 00:05:27.220 --> 00:05:37.220 Taken together, the people of the world have zero income from outside and zero expenditures on outside goods. 49 00:05:37.220 --> 00:05:44.320 Fallacies in thinking about foreign trade will disappear if we understand that balances 50 00:05:44.320 --> 00:05:51.680 of payment are merely built upon consolidated individual transactions, and that national 51 00:05:51.680 --> 00:05:58.740 balances are merely an arbitrary stopping point between individual balances on the one 52 00:05:58.740 --> 00:06:04.960 hand and the simple zeros of a world balance of payments on the other. 53 00:06:04.960 --> 00:06:10.800 There is, for example, the perennial worry that a balance of trade will be permanently 54 00:06:10.800 --> 00:06:18.800 unfavorable, so that gold will drain out of the region in question until none is left. 55 00:06:18.800 --> 00:06:23.200 Drains of gold, however, are not mysterious acts of God. 56 00:06:23.200 --> 00:06:30.620 They are willed by people, who on net balance wish for one reason or another to reduce their 57 00:06:30.620 --> 00:06:33.080 cash balances of gold. 58 00:06:33.080 --> 00:06:39.120 The state of the balance is simply the visible manifestation of a voluntary reduction in 59 00:06:39.120 --> 00:06:45.520 the cash balance in a certain region or among a certain group. 60 00:06:45.520 --> 00:06:51.120 Worries about national balances of payment are the fallacious residue of the accident 61 00:06:51.120 --> 00:06:58.640 that statistics of exchange are far more available across national boundaries than elsewhere. 62 00:06:58.640 --> 00:07:04.280 It should be clear that the principles applying to the balance of payment of the United States 63 00:07:04.280 --> 00:07:10.920 are the same for one region of the country, for one state, for one city, for one block, 64 00:07:10.920 --> 00:07:13.360 one house, or one person. 65 00:07:13.360 --> 00:07:19.880 Obviously, no person or group can suffer because of an unfavorable balance. 66 00:07:19.880 --> 00:07:27.200 He or the group can suffer only because of a low level of income or assets. 67 00:07:27.200 --> 00:07:33.720 Seemingly plausible cries that money be kept in the United States, that Americans not be 68 00:07:33.720 --> 00:07:40.320 flooded with the products of cheap foreign labor, etc., take on a new perspective when 69 00:07:40.320 --> 00:07:45.680 we apply it, say, to a family of three Jones brothers. 70 00:07:45.680 --> 00:07:51.860 Imagine each brother exhorting the others to buy Jones, to keep the money circulating 71 00:07:51.860 --> 00:08:20.860 Another popular argument is that a debtor group or nation cannot possibly repay its debt because its balance of trade is in fundamental disequilibrium, being inherently unfavorable. 72 00:08:20.860 --> 00:08:30.860 This is taken seriously in international affairs, yet how would we regard the individual debtor who used this excuse for defaulting on his loan? 73 00:08:30.860 --> 00:08:44.860 The creditor would be justified in bluntly telling the debtor that all he is saying is that he would much rather spend his money, income and assets on enjoyable goods and services than on repayment of his debt. 74 00:08:44.860 --> 00:08:51.940 and Debt, except for the usual holistic analysis, we would see that the same holds true for 75 00:08:51.940 --> 00:08:53.380 an international debt.