You often hear a big ta-do being made about the "Current Account Deficit" and imports exceeding exports. And often in the same sentence, or at least the same paragraph. And you may get the impression that the deficit is a result of our importing more than we export.
If this is what you think you have fallen for the govt's spin. And you are thinking exactly what they want you to think. Because to know the truth would reveal that
the govt is at fault for deficits - and not people buying more overseas goods than the country sells to overseas.
To fully appreciate this you need to really know what a deficit is.
A deficit is the shortfall between what the govt has budgeted to spend (and likewise did spend) and what they really got back in from the people.
It is best to explain it with an example...
Lets say the govt thinks it will get in $500 million from the people (Yes, this is a small sum, but it is for example purposes only. The principle is the same). So the govt will proceed to spend $500 million dollars. At the end of the year it will tally up the money is took from the people (by way of taxes) and it only has $400 million. The result is a deficit (shortfall) of $100 million.
This $100 million is then passed on and called The National Debt.
Next year, the govt estimates it will take in $600 million and proceeds to figure out ways to spend $600 million. At the end of the year it discovers it has only taken in $450 million. To everyone's shock, the current account deficit is NOW $150 million. Everyone thinks the deficit has increased by $50 million. And it has, compared to last year. But overall, the entire deficit is now actually $250 million.
This new $150 million shortfall is likewise passed on and added to The National Debt. Bringing the National Debt's total to $250 million.
The year after, the govt estimates it will bring in $650 million and proceeds to figure out ways to spend that $650 million. At the end of the year it discovers is has brought in $550 million (a $100 million shortfall). Everyone thinks the govt's smart money management has brought the deficit down from $150 million to $100 million. Without realizing this deficit is a NEW deficit.
This new $100 million deficit is passed on and added to the National Debt, increasing it from $250 million to $350 million.
The following year, the govt estimates it will bring in $700 million and figures out ways to spend that $700 million. At the end of the year is discovers it has taken $650 million (a $50 million shortfall). Everyone once again thinks the govt is wonderful by managing to "pay off" an extra $50 million off the deficit. But they don't realize, this is a NEW deficit and not a running total. The deficit is not being "paid off". Instead, the amount the govt goes behind each period is just coming down.
This new $50 million deficit is passed on and added to the National Debt, increasing it from $350 million to $400 million.
Now we get to a surplus year...
This year, the govt seeing the error of its ways, under-estimates the amount it will bring in and says it is $600 million. So it works out ways to spend $600 million. When it brings in $650 million, the economy is $50 million in Surplus. There is much rejoicing as people mistakenly think the deficit has finally been "paid off". Leftist govts then turn around and accuse the right leaning govts in power who achieved this "surplus" of over-taxing the people. And because it appears there is now excess money in the kitty, people start clamoring for it. Give it back by way of tax cuts, reduced fuel prices, give it to schools, etc.
Like the deficits of before, this surplus is passed on to the National Debt. But because it is not a debt increase but a reduction, the $50 million comes off the $400 million national debt bringing it down to $350 million.
As you can see, the deficit slate is wiped clean each reporting period and passed on to the National Debt. As the deficit goes up and down, the people mistakenly think - thanks to the govt - that the govt is "paying off" the deficit. If a govt under-estimates the money it takes from its citizens, and therefore doesn't figure out ways to spend it, the economy appears to be in surplus. But like the deficit slate, the surplus slate is also wiped clear each reporting period.
This means, the very next year could see a deficit again. And people will be puzzled at how the govt could have squandered the surplus it had. But they don't realize the deficit and surplus slates are wiped clean each year. And that the deficit and surplus are only a measure of govt spending vs money taken from the people for that reporting period.
It should be pretty clear to you by now, that any govt can create a surplus simply by under-estimated income on purpose. So that when more money is brought it, the govt looks good in the people's eyes.
And what of the National Debt?
Oh boy. You don't want to look at that. For you will see the TRUE measure of govt performance over time. And you will see that ALL govts actually increase the size of the National Debt over the time they are in office. For deficits are ALWAYS much bigger than surpluses.
Remember, a $50 million deficit this year followed by a $8 million surplus next year, does NOT mean the govt "paid off" $50 million and had $8 million left over. It means that over those two years, the govt is $42 million in the hole. And this is hushed up by passing it on and calling it National Debt.
Notice how the media never talks about national debt but focuses on current account deficit. That's because the media is on it. They need to be to keep the masses placated.
About now you might be asking, if the govt keeps going in the financial hole each year by spending more than it brings in, where does the money come from that it spends?
The govt owns the printing presses and simply prints it up. The extra money hits the economy. And creates inflation.
This is why high deficits ALWAYS lead to high inflation.
Of course, the govt can't let it be known that inflation is due to its bad management of money, so cleverly disguises it as a part of the Consumer Price Index (CPI). It tells us, if the CPI is high inflation is high and if the CPI is low, inflation is low.
But the truth is far more stark and never comes out. Let me show you how sly the govt is...
The CPI is: the weighted average cost of a standard basket of retail goods expressed in relation to a base period.
The questions you now need to ask are: What are the items included in this "market basket" and what is the "weight" which is applied to the number.
The answer to these questions is unknown. Only the govt knows. But I will say this... what is included in this "basket" changes as the govt sees fit.
For example: In the US, prior to 1983 the CPI measured housing prices using a procedure that included changes in the "asset value" of owned homes. BUT because the asset value of houses was growing so much faster than the consumption value, the inflation rate that included asset values was excessive. So to make the numbers look good, the govt stopped using "asset value" as a measure and instead started using "rental equivalence" - whatever that is.
Knowing this, you can now see, if the govt included house prices in its CPI calculation, the CPI would go off the chart during a boom period. And people would think inflation is running out of control. So during those housing boom periods the govt will remove house prices from the CPI "basket" and put in something else that is either going down in price due to competition (like DVD players) or is staying fairly even in price.
The CPI all depends on what the govt decides is in the basket of goods for that calculating period. So it comes up with whatever number it wants to. All in an effort to disguise its bad money management and the national debt it keeps increasing.
So next time you hear a politician accuse the govt of over taxing people because there was a surplus, or of squandering a surplus which was left it from a previous govt, you know the truth. The deficits and surpluses happen as the govt sees fit, the slate is wiped clean each year and passed on to the National Debt, which is always going up over time. The shortfall is made up by the govt printing money. Which causes inflation. The govt then disguises its part in causing inflation by saying it is the CPI. And the govt manipulates the CPI as it sees fit to present good numbers to the public and to further hide what it did.
The fact is, if ANY business in the free market was to operate as the govt does, it would be out of business before the year was out - as banks kept seeing its debt increase without repayments being made and would foreclose on the business.