The only way that unbalanced external accounts across nations (some countries with surpluses and other deficits) can exist is because the surplus countries desire to hold financial assets denominated in the currency of the deficit countries.
Answer: True
The answer is True.
Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system. For example, most will associate the rise in the current account deficit (exports less than imports plus net invisibles) with an outflow of capital. They then argue that the only way Australia (if we use it as an example) can counter this is if Australian financial institutions borrow from abroad.
They then assume that this is a problem because it means, allegedly, that Australia is "living beyond its means". It it true that the higher the level of Australian foreign debt, the more its economy becomes linked to changing conditions in international credit markets. But the way this situation is usually constructed is dubious.
First, exports are a cost - a nation has to give something real to foreigners that it we could use domestically - so there is an opportunity cost involved in exports.
Second, imports are a benefit - they represent foreigners giving a nation something real that they could use themselves but which the local economy will benefit from having. The opportunity cost is all theirs!
So, on balance, if a nation can persuade foreigners to send more ships filled with things than it has to send in return (net export deficit) then that is a net material benefit to the local economy.
We say the real terms of trade are in the importing nations favour.
I am abstracting from all the arguments (valid mostly!) that says we cannot measure welfare in a material way. I know all the arguments that support that position and largely agree with them.
So how can we have a situation where foreigners are giving up more real things than they get from the local economy (in a macroeconomic sense)?
The answer lies in the fact that the local nation's current account deficit "finances" the desire of foreigners to accumulate net financial claims denominated in $AUDs.
Think about that carefully.
The standard conception is exactly the opposite - that the foreigners finance the local economy's profligate spending patterns.
In fact, the local trade deficit allows the foreigners to accumulate these financial assets (claims on the local economy).
The local economy gains in real terms - more ships full coming in than leave! - and foreigners achieve their desired financial portfolio. So in general that seems like a good outcome for all.
The problem is that if the foreigners change their desire to accumulate financial assets in the local currency then they will become unwilling to allow the "real terms of trade" (ships going and coming with real things) to remain in the local nation's favour.
Then the local econmy has to adjust its export and import behaviour accordingly. If this transition is sudden then some disruptions can occur. In general, these adjustments are not sudden.
This bi-lateral example extends to multi-lateral situations which become more complicated in terms of who is holding what but the underlying principle is the same.
A net exporting must be desiring to accumulate financial assets denominated in the currencies of the nations it runs surpluses with. It may then trade these assets for other claims (not necessarily in the original currency) but that doesn't alter the basic motivation.
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