Printing money is often touted as the solution to the macroeconomic problems faced by developed economies today, namely lacklustre GDP growth, public and private overindebtedness and underemployment. However, could a trade surplus go a long way to remedying each of these by increasing aggregate demand instead? My line of thinking is as follows:

  • Given that AD = C + G + I + (X - M), moving from trade deficit to surplus would have a positive effect on output. This much is obvious. The decline in foreign holdings of domestic currency, an injection into the economy, would then allow domestic economic agents, both public and private, to deleverage without causing unemployment, at least at the aggregate level. Although I am no expert, I get the impression that the risk of unemployment / weaker GDP growth has since 2008 been the biggest obstacle to reducing debt:GDP ratios faced by governments in developed trade-deficit countries, which can be observed by comparing net exporter Germany's government debt:GDP ratio with net importers like the US, UK and France.

  • Underemployment would be at least partially offset by a trade surplus if exporters are exporting more, with increased demand drawing factor inputs to the export sector. Most proponents of MMT point to the apparent underutilisation of resources such as factory capacity and labour as a reason to introduce full employment policies using printed money; perhaps this problem wouldn't be so apparent if countries like the US and UK didn't have chronic trade deficits or, on the flip side of the coin, overvalued exchange rates, which harm domestic producers. I admit to not having looked at the data on economic slack between net exporting and net importing countries; it could well be that it occurs irrespective of the balance of trade. At a simplistic level, however, I would expect net exports to be a positive in this regard.

With that in mind, would printing money be necessary for remedying developed world macroeconomic problems such as underemployment and overindebtedness if trade deficits are closed? In other words, would such problems occur regardless of a trade deficit? China has very high private debt levels in spite of being a net exporter although I feel they're a special case as they're more of a state-driven than market-driven economy.

As a disclaimer, I am not making the case against public money creation as a potentially useful policy towards a healthier economy; it may well be a worthwhile policy if the problems above also occur under conditions of balanced trade. I am merely uncertain as to whether it solves or merely alleviates some of the macroeconomic problems that developed economies face today. If the US economy is structured in a way that tends toward over indebtedness and trade deficit, money creation may simply mask or worsen those problems for example by inflating export prices, by stimulating demand for imported goods, by encouraging further indebtedness. This seems to have been the recent experience of the US with its extensive use of QE and fiscal deficits to [rightfully] see people through lockdown recessions.

PS By public money creation I am referring to policies which directly inject money into the 'real' economy as opposed to the financial sector alone. So, I don't believe QE in the absence of large fiscal deficits is relevant to this question though do correct me if I'm mistaken.



Expansionary monetary policy would be still required in recessions. Also, the solution proposed by you is not viable.

Full Answer

I will start with discussion of viability of your mercantilist 'solution' and then proceed to explaining why monetary policy would be still necessary.

On the viability of trade surpluses

First, the solution itself is not really viable in a long-run. This is for several reasons. To begin with this solution is not viable to follow for all countries, for every country with trade surplus there has to be some country with trade deficit, if all countries would try to run trade surpluses none could. Since, one country's $X$ is another country's $M$ so already from a get go this is non-starter as a policy for whole world to follow, at least not when economy is being hit by homogenous shocks like covid-19 pandemic, Great Depression or Great Recession.

Next, it would be difficult for government to increase $X$ without expansionary monetary policy (AKA printing more money). The way how governments typically encourage exports is via loose monetary policy that lowers exchange rate (e.g. see Blanchard et al Macroeconomics Ch 6). Without monetary policy trade surplus leads to exchange rate appreciation as demand for exporter's currency will increase which pushes exchange rate up. As exchange rate appreciates foreigners suddenly discover buying our exports is becoming more expensive and they will switch to local producers or some other exporters with better terms of trade.

The only other major way government could encourage trade surpluses would be via some mercantilist protectionist policy, but policies that restrict trade damage economy in other ways. For example, lack of trade leads to less innovation (there are less technological spillovers), through negative wealth effects on consumers it would likely also depress aggregate demand (see discussion of protectionist policies in Krugman et al International Economics ch 10). Even in cases where economic theory suggest protectionism could be beneficial, due to problems of rent-seeking and regulatory capture such policies are still practically non-viable (see Krugman 1987). Furthermore, recent poll among top US policy economists shows that in the profession there is virtually unanimous support for free trade (see poll here). This is because in the profession it is taken for granted that these sort of mercantilist 18 century economic policy does not work.

So trying to significantly boost exports, without some sort of expansionary monetary policy is non-starter.

Why expansionary monetary policy is necessary

It is generally accepted that economy has problem with nominal rigidities (See Blanchard et al Macroeconomics pp 220). For example, wages are often nominally rigid because contracts are set in nominal terms and there is a lot of bargaining involved in renegotiating them. Expansionary monetary policy helps to get rid of these rigidities as inflation erodes real value of wages even in absence of any renegotiation. Running trade surplus does not help with this issue at all.

It is accepted by virtually all economists that small rate of inflation is thus desirable (and the way you get that in a long run is via expansionary monetary policy). As a matter of fact many central banks, such as the ECB, even define price stability in terms of having about 2% inflation (see this ECB explainer).

I do not think there is any way how you could get 2% inflation on average over business cycle with running trade surpluses. If anything, that would be likely to produce some deflation, since increase in output is, ceteris paribus, deflationary which would be disastrous (in fact Great Depression, became Great because Fed let money supply contract which lead to deflation - see Friedman and Schwartz: Monetary History of the US).


Most proponents of MMT point to the apparent underutilisation of resources such as factory capacity and labour as a reason to introduce full employment policies using printed money;

Also, to be clear, the above is not MMT. MMT is not accepted economic theory (see this IGM poll where virtually all Ivy league US economist reject core MMT propositions), even though here the MMT policy advice seems to align with the advice you would get from regular economists. The answer above is just based on widely accepted mainstream macro.

  • $\begingroup$ Thanks for your answer @1muflon1. $\endgroup$ Aug 25 at 11:06
  • $\begingroup$ @TimDoherty you are welcome, if you think the answer answered your question consider eventually accepting it $\endgroup$
    – 1muflon1
    Aug 25 at 11:13
  • $\begingroup$ The poll is misleading as the propositions being polled are not "core MMT propositions" $\endgroup$
    – user253751
    Aug 25 at 13:25
  • $\begingroup$ I agree with your point that monetary policy is necessary for stabilising the business cycle regardless of trade. However, the question is more focused on structural, long-term problems and their link to chronic trade deficits, in the context of certain developed economies such as the US and UK, rather than somehow using trade surpluses as countercyclical policy. I'm sorry if my question was unclear, I'll amend it. $\endgroup$ Aug 25 at 13:34
  • $\begingroup$ @TimDoherty what I have written above applies to US and UK as well, trade policy is simply not useful stabilization tool, and given the current free trade consensus there is very little that government can do to affect trade aside from actually using monetary policy. The trade deficit in the US is not even considered a problem in economics and is mainly result of strong dollar, so if you want to reverse that you would want US to follow expansionary monetary policy. $\endgroup$
    – 1muflon1
    Aug 25 at 13:57

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