Forex: Balance of Payments

Here, the balance of two payments consists of two accounts--- current and capital.

The current account includes visible trade (imports and exports of goods); invisible trade (payments and receipts for services such as shipping, insurance and tourism); private transfers, such as remittances from migrant families, interest and dividend payments; and official transfers, such as debt interest and payments to international organizations.

However, the capital account includes long-term capital flows (these, plus the current account balance, are sometimes known as the 'basic balance'); and short-term autonomous capital flows, excluding government transactions for balance of payment purposes.

The combined current account and capital amount are balanced--- total inflows must equal outflows--- by changes in a country's reserves, borrowing from (or lending to) international institutions, and foreign currency borrowing (or lending) by the public sector.

Balances of payments interact among countries--- one country's surplus is equivalent to another's deficit or shortfall. A good example of this was in the 1970s, when the counterpart to the vast surpluses of the OPEC producing countries was the accumulated deficits in the rest of the world. As the OPEC surplus has declined, the corresponding aggregate, though, countries differ, for example: Japan has a large surplus and the U.S. a big deficit, each of which is equal to more than half of less-developed word's deficit.

Because the current and capital accounts to balance, a country with a deficit on its current account must have a surplus on its capital account (or vice-versa). Countries which import more goods and service than they export on their current account will have a surplus on their capital account.

The intentional debasing of currencies is not new.

The practice stretches back to the days when gold coins were used, when the currency could be debased by melting the gold, adding other base metals and producing new coins. The Romans used this method to 'manufacture' money, and in due course it led to rampant inflation, unsuccessful price controls, ineffectual laws about legal tender and a flight of gold and silver out of the country to escape ancient Rome's tax collectors.

Now, the modern approach includes large deficit financing, inflationary money supply policies and general interference in the economic life of the community.

A currency that has been debased buys fewer foreign goods and services, because it has fallen in value against other currencies; its lower value also increases costs at home, and leads to lower standard of living. Government refusal to accept that a current account deficit should be fully translated into a lower standard of living leads to huge borrowings.