Thursday, August 9, 2007

Wealth of Nations - We the People ...

"A country's total output consists of both goods and services - houses and haircuts, sausages and surgery - but the international trade balance consists only of physical goods that move. The American economy produces more services than goods, so it is not surprising that the United States imports more goods then it exports - and exports more services then it imports. American know-how and American technology are used by other countries around the world and these countries of course pay the U.S. for these services. For example, most of the personal computers in the world run on operating systems created by the Microsoft Corporation, But the foreign payments to Microsoft and other American companies for their services are not counted in the international balance of trade, since trade includes only goods, not services."

"This is just an accounting convention. Yet the American "balance of trade" is reported in the media as if this partial picture were the whole picture and the emotionally explosive word "deficit" sets off alarms."

At some point during the next 15 months or so, we are all going to hear examples touted of how badly mis-managed the U.S. economy is/has been/will be under TODDIT (The or That, the political variation of the O.J. defense - Some Other Dude Did IT). The terms "trade deficit" and "balance of payments" will be tossed around to justify virtually any position, seemingly in total contradiction to previous positions taken, and rigorously relying on official government reported numbers in every instance.

When that happens, keep the quoted text herein in mind. And don't panic.

"With trade deficits, as with many other things, what matters is not the absolute size but the size relative to the size of the economy as a whole. While the United States has the world's largest trade deficit, it also has the world's largest economy. The American trade deficit is 6 percent of the country's Gross Domestic Product ..."

"The point here is that neither international deficits nor surpluses are inevitable consequences of either prosperity or poverty and neither word, by itself, tells much about the condition of a country's economy. The word "debt" covers very different kinds of transactions, some of which may in fact present problems and some of which do not. Every time you deposit $100 in a bank, that bank goes a hundred dollars deeper into debt, because it is still your money and they owe it to you. Some people might become alarmed if they were told that the bank in which they keep their life's savings was going deeper and deeper into debt each month. But such worries would be completely uncalled for, if the banks growing debt means only that many other people are depositing their paychecks into that same bank."

It seems that people everywhere are constantly trying to frighten us into surrendering some of our wealth or reputation or authority over to them, political candidates most notoriously of all. Don't be afraid. Mastering the fundamental knowledge necessary to make an informed decision, based on the merits of your personal circumstance, is not difficult, as you have just read for yourself. Whether or not we Americans choose to retain our inheritance of liberty and freedom is up to each of us, of course, but knowledge is the only certain way of doing so. Read the book.

All quoted text taken from Chapter 21 of Basic Economics - A Common Sense Guide to the Economy, by Thomas Sowell.

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