Many people think in non-systematic terms.? They consider the US current account deficit to be an unmitigated disaster.? They look at one side of the issue and conclude that the US has become less competitive.

Understanding accounting, the books must balance.? Not everyone can run a current account surplus.? Some countries must run deficits in order to purchase goods from those that run surpluses.? Capital account surpluses balance out current account deficits; net foreign investment fills the gap.

Marc Chandler, with whom I became acquainted while writing for RealMoney, has written a book for the average reader to explain the basics of international economics and foreign exchange.? The book deals with common myths that arise in the discussion of trade and currencies.

Why do we lose industrial jobs in the US?? It’s not foreign competition, though that may occasionally play a role when countries subsidize their industries.? We lose industrial jobs because of technological improvements that require less labor in the manufacturing processes.? As I have said, Nucor was a bigger risk to the rest of the steel industry than foreign competitors.

Chandler is a proponent of the turn-of-the-century Open Door Policy, which led the US to be more free market capitalist than the rest of the world, gaining influence through trade.? Together with military victories, this led the US to be the world’s dominant economic power post-WWII.? Given the change in currency regimes, this made the US Dollar the leading reserve currency in the world.

Aside from military superiority, and political calm,? labor market flexibility and a culture of innovation have made the US dominant in global economic affairs.? As I have sometimes said, if the world did not have America, it would have to invest one.? Where else would all of the spare labor, capital and goods go?

There are advantages to being the world’s reserve currency.? The US runs current account deficits, and other nations buy our debts.? Such a deal; every nation should want this (but, as we learn, it is likely only one nation can have this at a time).

Capital flows are much larger than trade flows; it should be no surprise that the US Dollar does not react to the current account deficit.

(An aside: when I was in Grad School, the idea that interest rates drove currencies through arbitrage was new, and gaining favor.? Since then, a blend of the interest rate markets and goods markets driving currencies is the dominant paradigm, with momentum thrown in.)

Chandler deals with these issues, and other myths that plague the discussions around international economics and the currency markets.? In general, I agree with his views, but with a few quibbles/additions:

• It is not costless for countries to run current account deficits.? Countries that run current account deficits have to offer attractive opportunities for foreigners to invest in their country, or suffer declines in the value of the currency.
• The country taking the non-economic action will eventually pay the price.? Whether hoarding gold in mercantilism, or neo-mercantilism, hoarding US debt assets, whether Japan in the late ’80s or China today, the nation forcing the issue gets hurt more.? China will suffer for over-promoting growth of exports.
• It would be reasonable to have a gold standard once more — the trick is setting the initial price level, so that it would not be inflationary or deflationary.
• It would have been nice to offer retail investors some theory to explain how currencies move, rather than just dispel myths.? That said, there probably is no such theory, and if it exists, ordinary people probably could not understand it.

Absent my quibbles, on foreign currency Marc Chandler knows far more than me.? If foreign exchange and trade is of interest to you, you will benefit from this book. One more note: this is not a technical book with lots of math, and there is no technical analysis on its pages.

If you want to buy the book, you can buy it here: Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange

Full disclosure 1: I actually read the books that I review.? Many reviewers don’t.? They read the stuff the PR flack sends along, and read a chapter or two, and write the review.? I throw away what the PR flack sends before I read the book.? I give you my own opinion on the matter, nothing more, nothing less.? Finally, if you enter Amazon through my site and buy anything, I get a small commission.

Full disclosure 2: long NUE