Inside the 1980s, Milton Friedman, the Nobel Prize-winning economist and father of Monetarism,
contended that a few of the concerns of trade deficits are unfair criticisms in an attempt to
push macroeconomic policies favorable to exporting industries.
Prof. Friedman argued that trade deficits are not necessarily essential as high exports
raise the value of the currency, reducing aforementioned exports, and vice versa for
imports, thus naturally removing trade deficits not because of investment. Yet since 1971, when
the Nixon administration defaulted on American obligations under the 1944 Bretton Woods
agreement to balance America’s accounts using the globe, America’s Current Account
accumulated trade deficits have totaled $7.75 Trillion as of 2010, far from becoming naturally
removed, and representing borrowed prosperity on an epic scale, representing a almost $8
Trillion “living beyond America’s means” error & miscalculation upto 2010 on Friedman’s
part. The almost $8 Trillion accumulated Current Account trade deficit, coupled with
increasingly larger U.S. budget deficits, national debt, and its carrying-cost interest
obligations, also puts at risk via its mismanagement America’s Reserve Currency global
trading status for the US Dollar, as other nations are now considering and proposing a
diversified “basket of currencies” index as a new, additional stable global trading system’s
Reserve Currency, replacing the US Dollar’s status. This would then force holders of US
Dollars to sell their dollar on foreign exchange markets for the new Reserve Currency in
order to trade goods & services inside the global market. Increased selling demand on the US
Dollar, along with less demand to want and hold US Dollars, would force downward pressure on
the dollar’s value and be worth less in new Reserve Currency exchange. A dollar’s falling
worth would enhance inflation risk. The 1944 Bretton Woods agreement was put in place to
prevent balance of payment crisis’s from unraveling the global program. Big trade
imbalances in today’s gloabl economy are now threatening the international trading program,
with the 1944 Bretton Woods agreement effectively in default.
Milton Friedman’s son, David D. Friedman, shares his father’s view and cites the comparative
advantage ideasidea that trade
deficits actually had been a manifestation of profit, instead of a loss. He proposed as an
example to suppose that he, a Frenchman, exported French wine and imported British coal,
turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50
francs to England. The customhouse would record an export of 50 francs. If, in England, the
wine sold for 70 francs (or the pound equivalent), which he then utilised to buy coal, which he
imported into France, and was discovered to be worth 90 francs in France, he would have produced a
profit of 40 francs. But the customhouse would say that the worth of imports exceeded that
of exports and was trade deficit against the ledger of France.[30]
By reductio ad absurdum, Bastiat argued that the national trade deficit was an indicator of
a successful economy, instead of a failing one. Bastiat predicted that a successful,
growing economy would result in greater trade deficits, and an unsuccessful, shrinking
economy would result in lower trade deficits. This was later, in the 20th century, affirmed
by economist Milton Friedman.
Knowlege of Foreign Exchange | admin | 
January 31, 2011 8:34 am | 
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