Are we targeting the wrong deficit?


Keynes and his contemporaries did not share our present day casual attitude to the imbalances we see in international trade. The monthly, or quarterly, trade figures were a regular and prominent feature of our business news, at one time, but we have to look much harder to find those same figures now.

Keynes’s proposal that international trade be separated from domestic trade by the use of a separate international currency, the Bancor, formed part of the official British proposals at the 1944 Bretton Woods  conference  which set the international financial and monetary arrangements for the post war period. Unfortunately this was a step too far for the Americans at the time. The proposal, had it been adopted, would have penalised the surplus nations, making it less attractive for countries to run large export surpluses and would have encouraged the deficit nations to re-align their currencies to reduce their deficits.

Keynes understood, what we seem to have forgotten, that if any particular country, as a whole, has a net deficit trading position with the rest of the world then either the government of that country, or the inhabitants of that country, have to fund that deficit by borrowing. In other words, the internal deficits run by governments, and the extent of the debts which can accumulate in the private domestic sector, are directly related to the external deficits caused by a trade imbalance. So, we can see that countries such as Germany, Switzerland, Holland and Denmark which run large trading surpluses do not have any of the public or private sector debt problems which we see in the UK or USA which run large trading deficits. Unfortunately, though, the solution to world debt problems cannot be for everyone to run a trading surplus!

George Osborne’s proposals for reducing the government’s deficit simply do not take these fundamental relationships into account. Transferring the burden of debt, necessary to sustain the current UK trading imbalance, from government to the private sector is going to do less than nothing to solve the economic problems of the country. If he wants to reduce his government’s deficit, without crashing the economy by imposing an unrealistic debt burden on everyone else, he has to acknowledge that this can only be done by reducing the external or trade deficit too. He has to start to tackle the problem from both ends.

* Peter Martin is not a LibDem party member but has voted LibDem in previous elections.

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This entry was posted in Op-eds.


  • Two observations: Firstly, cutting the government’s deficit does not mean *UK* households have to borrow more. Instead it is more likely that we borrow less from overseas. People who don’t want to face up to the necessity of cutting government borrowing often come up with the argument that “you’re just forcing the private sector to borrow instead”, ignoring the difference between the UK private sector and the overseas private sector.

    Secondly, reducing the trade deficit is dependent on external demand being there for UK goods and services. Most of our deficit is with the European Union. Until the Euro zone economy recovers and/or the Euro rises against the pound, this situation is not going to be solved.

    Furthermore, we need to move away from controlling consumer spending, the housing market and inflation by using interest rates. The first effect of any interest rate rise is to force up the pound, kill exports and suck in imports. So every time consumer spending goes crazy, manufacturing gets clobbered. Until we find other ways of limiting overspending, we are going to be condemned to repeat this cycle, destroying our export sector and remaining industrial base with the blunt instrument of interest rates rises.

  • John Roffey 1st Feb '16 - 6:49pm


    “If he wants to reduce his government’s deficit, without crashing the economy by imposing an unrealistic debt burden on everyone else, he has to acknowledge that this can only be done by reducing the external or trade deficit too. He has to start to tackle the problem from both ends.”

    Is this possible under the rules in place for the free global market and our membership of the EU – and won’t this be made even more difficult once TTIP & TTP are ratified?

  • “Govt simply forced the transfer of some of the borrowing away from itself and has created a perilous situation of a huge credit created asset bubble in the property market.”

    The government hasn’t “forced” the UK private sector to borrow more by itself borrowing less. It just doesn’t work like that.

  • The idea that cutting the government deficit can increase the balance of payments deficit is just plain wrong. If anything it is the other way round: cutting the deficit reduces demand and therefore cuts imports, as has happened in some Eurozone countries.

  • George Kendal writes :
    “The problem with economics is that it involves human behaviour.”
    Yes,….And that one crucial fact is the one constantly overlooked. These, intricate and deep debates’ about debt/deficit, never factor in that one problem, which is ‘human nature’. Whether it be ‘ $ reserve’, the ‘Bancor’, or the newly proposed IMF ‘Special Drawing Rights’, we never take the trouble to embed a security mechanism into a world currency, whereby, some person, or group of persons cannot *mess with it*, to their advantage, and conversely, to the disadvantage of everyone else.
    Is it beyond doubt that a financial system [or any system], that can be manipulated by the greed of a group of human beings,.. will, with 100% certainty,..eventually, manipulated? So I think it’s fair to say that the debt/deficit financial woes we have today, were baked into the cake by our own failings decades ago.
    I suspect we are witness to the ghost of a prediction foreseen, by pretty much everyone who understands human nature, except for fashionable modern monetary economics. In their giddy hubris, many economists feel that Nixon liberated the worlds currency in 1971. In fact Nixon probably injected a fatal virus into the worlds currency, and that virus is called ‘human nature’. But please don’t take my word for it, listen to De Gaulle in 1965.

  • @ petermartin2001
    “It sounds like you are both attempting a sort of because-we-don’t-know-everything-therefore-we-know-nothing argument.”
    Errr,..Absolutely not. Any monetary system,.. if it can be manipulated by humans, ..*will* for sure, be manipulated by greedy unscrupulous humans. That must surely be a given ? Also,..any monetary system that has no peg to reality, will,.. due to human nature, get bloated exponentially, into unreality,.. which is frankly, exactly where we find ourselves here in 2016, with a currency pegged to… *nothing*.?
    This monetary system we use today, became freed from a gold peg since 1971, and now finds itself with an exponentially derived, and un-payable …..$200 trillion in global debt.? How did that madness happen? Clue ~ Human nature!!
    Once you drop the idea that you have to peg a monetary system to some form of physical asset, you are then candidly, in the twilight zone. And the next rung in this ladder of madness, is ‘printing cash out of thin air’. Bluntly,.. at this point financial madness has spiralled into psychosis. We have naively allowed ourselves, globally,.. to play a 41 year old game of pretend with our finances, and there is frankly, no way out but facing reality.
    Facts to be mindful of :
    The average longevity of all historically known global *fiat currencies* is about 37 years.
    Only one sustainable *money* system has been globally acceptable, ubiquitous, and lasted, 5,000 years plus.

  • George Kendall 4th Feb '16 - 3:44pm

    Hi Peter, probably best if the person explaining Hayek was an expert on Hayek, and actually was a Hayekian.

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