Monetary System … International Trade

International trade is a barter system!

We pay for our imports, not with money, but, with the goods we export.

While we might perceive that we have paid for imports with money, this is an illusion …

We can illustrate this best by considering an export.

Assume we export some goods to the USA, the recipient of the goods pays with Dollars. Now, Dollars are not legal tender in the UK, our Bank, instead of crediting us with the Dollars finds someone else who needs Dollars (because he is importing goods from the USA) and sells the Dollars that have been received to him, and we actually receive the proceeds of that sale. While we have not seen the processes that have taken place inside the bank, it is none the less the reality of the transaction.

We might say "what about forward cover?" Well actually, forward cover is simply the process of banks buying and selling currencies for future delivery. That this may have happened in advance of the export or import transaction does not change the underlying transactions.

We should be able to see that if imports exceed exports there will not be sufficient Dollars within our economy to pay for all our imports. This situation ultimately results in the country being forced to borrow money in the foreign markets on which interest will be paid, or else, allowing foreigners to redeem our debt by allowing them to purchase assets in our country.

Of course, these effects are not immediate and to a degree are ameliorated by the need of all countries to hold a reserve of foreign currencies to meet their own import requirements. We cannot however simply assume that other countries will be prepared to passively hold our prommissory notes (currency) indefinitely, in the shorter term they will be converted either into deposits within our banking system or into government bonds. In either case there will be interest flowing out of the country. In the UK, until around 2010 we had more interest and dividends flowing into the country than were flowing out. That situation has changed, an inevitable result of imports continually exceeding exports. The last year in which we had a trade surplus was 1998, subsequently the gap has continually widened with imports now exceeding 35% of total output and exports lagging at around 33%.

If we were brutally honest, we would say that over the last 15 years we have lived off the capital we owned around the world that had been built up over centuries of British Empire, until it has been wasted away! While we might still hold those investments there are now even bigger investments in the UK held by foreigners.

Our politicians tell us that so called "inward investment" is a sign of confidence in the economy … alas it is more likely a case of foreigners redeeming our debt by taking over assets!  

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