Current account-ing is totally arbitrary

The South African Reserve Bank released its Quarterly Bulletin for the third quarter of 2010 this morning, and economists rushed to see whether forecasts they had made were in line with the ‘official’ numbers.

Not entirely accurate, but it nevertheless tells a story

One such number that draws a lot of attention is the sub-category contained in the balance of payments called the current account.  It is effectively an account that attempts to record the exchange of present goods between South Africa and its trading partners.  It’s the sum of: 1) the difference between how much we export and how much we import in terms of goods and services, {minus} 2) money paid abroad to our creditors and investors in the form of interest and dividends, and {adds} 3) current transfer payments to South Africans (such as foreigners sending gifts or monetary support to people in SA).

Many economists and particularly politicians like to argue that the current account balance is a ‘concern’ or is ‘positive’ when it swings from surplus into deficit or deficit into surplus.  Ignore it, it’s not important, there are better things to do.

In the real world, everyone has a balance of payments.  Each working individual exports his/her labour, and imports payment in return.  The imports in monetary form then become a means to import more goods and services, and the money in turn then becomes an export as payment for these imports.  Each individual is in a continuous flux between being an importer and an exporter.

As a household is a collection of individuals, each household therefore also has a balance of payments.  A group of households such as a community also has a balance of payments, as it merely is a sum of each household’s balance of payments.  Do the same for several communities with borders that are arbitrarily chosen, and we have a balance of payments for a town.  Keep going on down this route, and we ultimately end up with a balance of payments for South Africa and then, the world.

There is an infinite number of arbitrary balance of payments accounts we can construct, and the balance of payments for South Africa is one of these.

Every individual, institution or business in the South African economy manages his or its finances to achieve certain ends.  The vast majority will, by looking after their own best interests, manage to run in the aggregate, a very tight financial ship.  Of course, people can and do make errors in judgement and can – to use one example – bite off more than they can chew and default on a debt liability.  Yet this doesn’t affect all of us, it will affect only the creditor and the debtor.

Die rooi gevaar, P&P on William Nicol...

Does it make any difference to anyone whether you shop at the new P&P on William Nicol to buy groceries and not at the grocer nearest to your home?  Is anyone concerned with the balance of your community’s trade when you order and have a pizza delivered from Scooters 10km’s from your house and not a Debonairs right around the corner?

So why does it suddenly gain some sort of economic importance when it comes to South Africa as a community?  South Africa’s borders are just as arbitrary, in an economic sense, as borders that would separate your community from your neighbours.

Clearly if you prefer to shop at the P&P on Nicol, you do so because you have weighed the alternatives and decided you prefer to shop there – it is your preference.

If your local grocer goes out of business because many people from your community choose to frequent another shop, is this a reason for your local municipality to bail the grocer out, or should the grocer improve the shopping experience to attract customers?  Modern governments tend to choose the bailout route, and now the argument is that the currency must be weakened to somehow help them out.  It is effectively the same as your local municipality pushing up your taxes to support the grocer yet you will continue to shop at the P&P on Nicol.  If this strategy fails, your local municipality can try and stop you from shopping ‘abroad’ and levy ‘import duties’ on goods ‘imported’ from the P&P.

There are so many unintended consequences and these policies tend to snowball and create a leviathan edifice of regulation.  Each step of the way consumers become poorer.

The reality is that politicians like to control everything from the money supply, to incomes, to industry, to health care, to laws, to the police, to Wikileaks, to the media, imports, exports, people and the flow of people, to mention a few.

Were South Africa and the rest of the world to be in a truly free market, where currencies were freely exchangeable and competed with each other in the sense that you can use rands to purchase a good or service in the UK or US, nobody would care about what South Africa’s trade or current account balance is with the rest of the world, in the same way that no one cares about Gauteng’s trade balance with Limpopo.  It would all be one big perfect balance that somehow tends to spontaneous order, all without the help of the government.