Richard Cantillon's book on political economy contains a number of thoughts on the subject of international trade. Many of these can shed light on the current state of the world, and what's happening behind the scenes as far as monetary policy is concerned.
Using gold as money, as was the norm back in Cantillon's days, he noted that a trade surplus would manifest itself as an influx of gold, as well as bank notes, bonds and other financial instruments convertible to gold. One way to detect a trade surplus was therefore to monitor gold refineries and mints. If foreign coins were melted down to mint domestic coins, that would indicate a trade surplus. On the other hand, if local refineries and mints were idle, that would indicate a balance of trade, or a trade deficit.
In a balanced environment, bank notes and bonds would serve as the dominant form of exchange. However, at the least sign of fiscal weakness, currencies would be dumped for the safety of gold. Mints and refineries, both local and foreign, were for this reason monitored closely by Cantillon and his banker friends. Once they realized that French bank notes were being dumped by foreigners, they started shorting them themselves, and they made an absolute fortune doing just that.
Fast forward 300 years and we find ourselves in a the bizarre world where bank notes are considered the ultimate safe haven, while gold is a mere commodity. When the UK exported a large amount of gold a year or two ago, this was registered as a trade surplus. They had after all exported a commodity in return for dollar denominated bonds and bank notes, so what would have been a big trade deficit back in Cantillon's days ended up as a surplus.
There's also a lot of puzzlement among bankers these days over the gap between China's trade surplus and their currency reserves. 100 billion dollars appear to be missing. But Cantillon and his friends would have had no trouble explaining this. They would have been reading reports from gold refineries all over the world and noted with interest that gold bars with their weight in ounces are melted down to produce gold bars with their weight in grams and kilograms. They would further have noted that gold is moving out of western countries and into eastern countries. From this, it's clear that a short position in western currencies relative to gold will be a winner over time. Furthermore, there's no puzzlement about the gap in China's official reserves. Gold reserves are rarely, if ever, reported honestly, least of all by nation states, so China is simply accumulating gold without reporting it.
Finally, Cantillon would have rolled over laughing if anyone had suggested to him that an unbaked paper currency like the US dollar is the ultimate safe haven. To even suggest such a thing displays great ignorance, and Cantillon would no doubt have made an additional fortune exploiting this widespread belief in society today.
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| Cumulative Current Account Balance 1980 - 2008 |
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