From And The Weak Suffer What They Must? By Yanis Varoufakis, loc 353-368:
What this means is that a closed, autarkic (meaning self-sufficient) economy, like that of Robinson Crusoe in literature or perhaps North Korea today, may be poor, solitary and undemocratic, but at least it is free of problems caused by other economies, by external deficits or surpluses.
In contrast, all modern economies have relations with others and can expect that these relations will almost all be asymmetrical. Think Greece in relation to Germany, Arizona in relation to neighbouring California, northern England and Wales in relation to the Greater London area or indeed the United States in relation to China – all imbalances with impressive staying power. Imbalances, in short, are the norm, never the exception.
As he goes on to explain, trade imbalances have particular significance for international relations because they have important second order effects for both financial systems. From Loc 368-382:
Just as one person’s debt is another’s asset, one nation’s deficit is another’s surplus. In an asymmetrical world the money that surplus economies amass from selling more stuff to deficit economies than they buy from them accumulates in their banks, but these banks are then tempted to lend much of it back to the deficit countries or regions, where interest rates are always higher because money is so much scarcer. In this way, banks help maintain some semblance of balance during the good times. If an exchange rate seems likely to remain stable or even the same, banks will tend to lend more to the deficit country in question, unworried by the prospect of a devaluation further down the line that might make it hard for debtors in the deficit country to repay them.
Bankers, in this sense, are fair-weather surplus recyclers. They profit from taking a chunk of the surplus money from the surplus nations and recycling it in the deficit nations. But if the exchange rate is fixed, the banks go berserk, transferring mountains of money to the deficit regions as long as the storm clouds are absent, the skies are blue and the financial waters calm. Their credit line allows those in deficit to keep buying more and more stuff from the surplus economies, which thrive on a spree of exports. Import-export businesses grow fatter everywhere, incomes boom in surplus and deficit countries alike, confidence in the financial system swells, the surpluses get larger and the deficits deeper.
Fixed exchange rates preclude this imbalance being wholly or partially corrected by a fluctuation in the relative value of the currency that would make the debtor nation’s goods more attractive on the international market and reduce the size of the debts denominated in this currency. In their absence, incomes shrink while debts remain unchanged, prompting a precipitous decline into economic ruin.
Mark Carrigan 