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Checks and balances

September 27th, 2002

My colleague Alex Robson attacks the Fairfax press, and Ken Davidson in particular, for referring to a balance of payments deficit, saying that we have a “current account deficit” and that “the balance of payments always balances” since the current account deficit is matched by capital account surplus, that is by borrowing from overseas (if’s odd to think of borrowing as creating a surplus, but that’s the way the accounts work).

If you’re going to throw stones on this sort of thing, you need to be on firm ground yourself, and Alex’s ground is rather shaky. Official statistics don’t refer to a “current account deficit” but to the “balance of payments on current account”, which is routinely shortened to “balance of payments”, since as we know, the “balance of payments on capital account” is just the same number with the opposite sign. So it’s a bit rich to call someone “illiterate” for referring to a “balance of payments deficit”.

Alex offers a lot of other quibbles, but doesn’t address the crucial issue. Is a continuing deficit in the “balance of payments on current account” benign or dangerous. Economists have debated this vigorously over the past decade. I lean, with Ken Davidson, to the view that it’s dangeorus.

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