“Consider what happens when individuals barter with each other,” he said. “A baker trades a loaf of bread with the farmer for a dozen eggs. A tailor trades a suit of clothes for a cow. A migrant worker trades an afternoon’s labor for a meal and a place to sleep. Is a ‘trade deficit’ possible in any of these cases? Could there be a deficit if, say, a shirt maker in China trades 1,000 shirts for 100 barrels of oil from, say, some producer in Texas?”

“Obviously, no. A gives something to B in exchange for something else and both get what they bargained for. No deficit is possible.”

“So how is it that when the farmer, or the migrant worker, or the Chinese shirt maker trade their goods and services for money, that suddenly the deficit problem pops up?”

“Because when individuals trade real goods, the exchange is complete. But when one half of an exchange is for money, the government enters the picture. Individuals create real goods and services with labor and capital, while governments create the money by “fiat” (i.e., by law), simply pushing computer keys and running printing presses. The newly created money, which cost next to zero to print, buys up real goods and services. And as the money percolates through the economy, it leaves a swath of destructive imbalances, including such things as inflation and trade deficits. Governments then step in with more laws and restrictions that purport to solve the economic problems that their fiat money policies spawned.”

“Money creation is a form of theft (and, as my friend Richard Maybury once said, theft is just a nice word for taxation), albeit so subtle that the public never seems to catch on. In a world where individuals and not governments were sovereign, the marketplace couldn’t have trade deficits or inflation, as the marketplace has feedback mechanisms to deal with anyone who creates irredeemable money. But when governments usurp the freedom of individuals by passing laws defining legal money as the money printed by the government, all manner of economic evils follow.”

“What can a sovereign individual do? Forget futile efforts to influence the politicians, and assume everything they do to ‘solve’ the trade deficit will reduce your freedoms even more. Go to the root of the problem, which is fiat money. Historically, gold and silver have been the free-market’s choice for trade, and the ultimate refuge from fiat monies. You can regain some sovereignty in the monetary arena by holding and dealing in real money whenever possible. Gold and silver, whether held as assets to defend against depreciating currencies, or as mechanisms for trade through free-market exchanges like GoldMoney.com, or LibertyDollar.org, are real money. Hold and use real, free-market money whenever you can.”

Source: Trade Deficit = Freedom Deficit