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Tuesday, Sep 16, 2025 - 00:20 SGT
Posted By: Gilbert

Money, Money Everywhere

"Therefore the skillful leader subdues the enemy's troops without any fighting; he captures their cities without laying siege to them; he overthrows their kingdom without lengthy operations in the field. With his forces intact he will dispute the mastery of the Empire, and thus, without losing a man, his TRIUMPH will be complete.

This is the method of attacking by stratagem."

- Sun Tzu's The Art of War, Chapter III - Attack By Stratagem


Before progressing into the analysis of the aftermath of the Universal Tariffs in terms of the splitting of the world into geopolitical blocs, the economic mechanism enabling this division should be thoroughly understood.

However, as with the essential objective of the unilateral tariffs being an object demonstration of American Strength - proposed (and explained) here in early May, but seemingly only getting acknowledged by the world at large after a coordinated collective knee-bending exercise towards the end of July - some very fundamental perspectives about tariffs and trade deficits (and surpluses), have pointedly not been addressed by the mainstream FAKE NEWS media, and their gaggle of establishment-friendly op-ed contributors.

A quick search of the archives reveals that this topic had been covered here back in July 2018 - soon after GEOTUS had [correctly] taken his G-7 "allies" to task for skimping on defence (so history informs) and having the cheek to impose higher relative tariffs on America towards maintaining a trade surplus with their U.S. benefactors - but an update and extension of the discussion is well in order, given that there has been next to no progress on setting the record straight in popular discourse.


The Immortal Walmart

It had been noted back in 2018 that a "Grocery Store Analogy" on international trade deficits had somehow come into vogue amongst otherwise-respectable economists, economic-adjacent pundits, foundations and think tanks. A quick Google search reveals that this (quite flawed, as we shall soon see) analogy (sometimes instead involving some other homely consumer enterprise of suburbia, such as barbers or Starbucks) has, if anything, grown more popular with time.

Indeed, limiting the search to articles published this year alone, this fallacy has been promoted by entities from all over the political spectrum, ranging from conservatives such as Ben Shapiro, libertarians such as Rand Paul and The Cato Institute, (self-claimed) non-partisans such as the Independent Institute and the NPR, classical liberals such as the AIER, and of course any number of random news outlets and Internet missives. With minor and immaterial variations, the pithy anecdote goes:

I have a trade deficit with my grocery store (and my barber, and the neighbourhood Starbucks, etc.), but it doesn't matter because I *want* to run a deficit with them; I want food, a stylish retro mullet and an avocado latte; they don't pay me anything, and that's all right because I voluntarily paid them for something I wanted. It's okay to run a large and growing trade deficit with them. [Insert optional joke about imposing tariffs on the grocery store, and Orange Man Dumb.]

To better understand as to where the faulty reasoning arises, one might inspect what should be the original version of the argument, as made by MIT Nobel laureate in economics, Robert M. Solow, latest by 1994: "I have a chronic deficit with my barber, who doesn't buy a darned thing from me"; however, earlier commentary is generally careful to clarify that "The economist is satisfied as long as he earns enough to pay his bills and save for a rainy day [i.e. not have an aggregate trade deficit]", as for example also emphasized by Mankiw in 2007. In contrast, modern quotations of Solow, such as in The Guardian and The Daily Beast, often omit this critical fact. Even where grudgingly acknowledged, such as by the New York Times, there is generally no further delving into the implications of an aggregate deficit - which is the whole point actually.


And a honkin' *massive* aggregate trade deficit it is too!
(Source: meketa.com, Modern Mercantilism: Trade, Technology, and Strategic Power in the 21st Century)


Since we're on approachable analogies, a more-realistic and applicable version of the above would probably be thus:

I have a trade deficit with my grocery store, and my barber, and the neighbourhood Starbucks, and the utilities companies, and the student loan lenders... and damn you're right that I have a large and growing deficit with nearly all of them. Fine, it's true that I have a services surplus* from my three part-time minimum-wage jobs in data entry, food delivery and dog-walking, which brings in about US$1,200 a month. However, my total goods deficit from the above is over US$3,000 a month. This means that I'm running an aggregate deficit of at least US$1,800 a month. Can you help me?

Now imagine a smarmy financial advisor taking in the situation, arranging his greasy hairdo, putting on his best corporate smile and responding:

Now, you see, deficits actually don't matter - you're getting stuff you want from your grocery store, aren't you? Don't you think it's unreasonable to try and reduce your deficit with them, or Apple or Amazon or Netflix or all those other entities you have a deficit with? It wouldn't be *fair*, right? So what if they don't buy anything from you? Think of the poor Walton family!

At this point, I hope it is obvious that the consumer would very justifiably suspect that this financial advisor's recommendations might not be in his best interests - because sometimes, the layman understanding is actually (more) correct.


[*One of the usual counterarguments against the titanic goods deficit being meaningful.]


Buffett, Revisited

One hopes it evident that the second, expanded analogy is far more representative of America's current position, than the (far more popular) original; a yet more complete analogy was famously proposed by Warren Buffett back in 2003, and reiterated in 2016 (reproduced here verbatim):

...Take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville (read: the U.S.A.) and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo - but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks [i.e. the U.S. dollar]).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. [key realization!] A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off - or simply service - the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.


Now, this is clearly not as snappy as the Solow's Barber analogy, which one supposes is the price to pay for increased accuracy. However, it might be summarized as a yet more ancient adage, which is that there is really no free lunch (from the grocery store, or anywhere else). As the Oracle of Omaha has wisely observed, the U.S. dollars used to pay for the aggregate trade deficits, are in fact (by and large) eventually used to buy America's wealth-producing assets from Americans.

This fact is often glossed over in Internet forums with handwaves such as "when the US runs a current account deficit, it must also run a capital account surplus, meaning that the deficit in trade is offset by a net inflow of foreign capital into the country", or "if exchange rates are in equilibrium, the trade deficit equals net capital inflows (usually considered a good thing)", etc. Hey, it's an automatic capital inflow surplus, right? That sounds quite desirable!

At this point, it might be noted that translated back to a personal finance environment, said "capital inflow surplus" would roughly be equivalent to a "cash account credit surplus"... which again sounds just dandy, until one realises that it actually just represents the withdrawal of cash from one's bank account (yes, accounting can get confusing - which is just how financial institutions and op-ed sophists like it). Again, sure a cash deficit - like a trade deficit - may not inherently be a bad thing... but as a first approximation, most people - and dare I say, countries - would do well to regard it as so.

Anyway, the relevant question would then become: has America in fact been hocking off its wealth-producing assets (or selling off its seedcorn, in other, older words), to fund its current profligacy (as reflected by their trillion-dollar annual aggregate trade deficit)? To be fair, such a deficit could be tenable if it is used to fund productive investment, or the personal finance equivalent of taking on student loans in the expectation of later increasing one's earnings with a high-paying job. Buffett has, of course, recognized this in designing his analogy, and points the reader to the net international investment position (NIIP) statistic (a broader version of net foreign assets)

In four words, it looks pretty bad:


Hey, it's a Negative Net International Investment Position surplus!
(Source: calamos.com)


As Wikipedia drily notes, while the U.S. had been the biggest net international creditor as recently as 1980, it had become the world's largest debtor by 1990, with America as a whole (comprising the U.S. government, companies and citizens) oweing a net US$16 trillion to the rest of the world (i.e. foreign governments, companies and citizens) by the end of 2022. This debt has, by the way, increased to US$26 trillion by April 2025. Obfuscating arguments that absolute figures don't matter due to the growth of the U.S. economy, might be countered by the fact that the U.S. NIIP has surged from some 10+% of U.S. GDP in 2006, to some 90% of U.S. GDP today.

Returning to Buffett's visionary analogy, it sure looks like Squanderville America is in fact selling off their land (and resources, and companies) to Thriftville foreigners, and moreover at a quite frantic clip. Actually, given the perennial popularity of the "Baby Boomers stole the wealth of later generations" narrative on Reddit, it is somewhat ironic that basically the same "wealth transfer/robbery from the future to the present" is being happily perpetuated by current Americans running up the trade deficit tab... while vehemently denying that it has any real effects (largely because, may I humbly suggest, that they [i.e. the current generation] aren't likely to be the ones to have to pay it back one way or the other)

Recognizing this probable (sorry) progression of events, the wise Buffett then proposed... essentially tariffs (in his own words, "...in truth it is a tariff called by another name"), by issuing Import Certificates (ICs) to U.S. exporters "in an amount equal to the dollar value of their exports". Then, to be able to import goods (and services) into the U.S., foreign exporters or domestic importers would have to (bid for and) purchase these ICs, in an amount equivalent to their import value. Through this, the trade deficit would automatically become balanced.

TRUMP's universal tariffs regime, then, might be understood as simply a more... brusque instantiation of Buffett's ideas, and to this one can only comment: Great minds think alike!


[To be continued...]



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