So, what about the trade deficit?

Fortunately, Australian governments' overseas borrowings and debt are trivially small, thus our risk of falling under the IMF's baleful glare is also very small. Our foreign debt and investment inflows are virtually entirely the business of business. When a business goes bust, so does its obligation to pay its creditors. When Allan Bond's businesses went belly up, our foreign debt shrank appreciably. We don't have a “banana republic” problem - of dictators borrowing from US banks and stashing the funds in Swiss banks. Governments here have been, all in all, too timid about borrowing for spending on economically beneficial public works - such as public infrastructure.

Why do we have a long-term trade and current account deficit? Why does the rest of the world send us all this stuff that we don't pay for? There are three possible explanations. Each explanation has its enthusiasts, and each has different implications for our future. The first is that we are incorrigible consumers, and spend (on credit) like there was no tomorrow. We hate saving and love consuming, and will consume all, and more of our incomes unless we are forced to save instead.

If this is the case, there must be incorrigible lenders overseas who delight in getting our businesses into hock, regardless of their ability to repay the loan: it will all end in tears, someone has to tell us to stop spending. The expectation of those who push this theory, mainly the “tabloid” media, is that government will have to crack down by raising interest rates and cutting public spending. In addition, we should be bullied into buying Australian, as a patriotic duty, or not buy anything unless it is Australian made. We might call this “the Dick Smith solution”.

The second explanation is that our costs of production are too high, our wages too high, holidays too long, there is too much union power and our workers are too lazy, so overseas producers, naturally, produce more cheaply and flood our markets with these cheap goods and services. This explanation did long service for the bosses and the conservative parties during the century and a half of fixed exchange rates. They never mentioned the poor levels of investment in capital equipment and low level technologies used in manufacturing industries that characterised Australian industry when it was protected by high tariffs (1908-1990).

This explanation has fallen out of favour, except in Sunday newspapers and commercial talkback programmes. Because our exchange rate is market determined, the absolute level of costs, of whatever kind, is irrelevant to whether we have a current account surplus or deficit. Particular cost levels will mean that some activities will be less profitable than others. For example, it is unlikely that Australia will ever be a major exporter, or even producer, of sugar beet or spruce timbers for the masts of tall ship replicas.

The third explanation is the one that makes some sense. It is that the rest of the world sees Australia as a place to make profits in the future. Their capitalists, be they the great multinational companies, or Belgian dentists seeking a good place to invest their superannuation, are willing to take their chances buying into Australian business activity, directly by setting up and maintaining businesses, or by buying shares in firms listed on the Australian Stock Exchange (or managed funds with such shares).

That's why they send us stuff. It may be machines for making money like computers, mining equipment or airliners. It might be buying AUD to pay wages here, which are then spent on everything that wages are spent on, including imports. The large size of a recent monthly deficit was due to some ships purchased; other months it is aircraft. These investment goods will directly add to our ability to earn income. But even if all we consumers wanted to import was cheese from Camembert, it wouldn't make a jot of difference, given that capitalists and businesses are risking their own money lending it to Australia.

The trade deficit, like the exchange rate of the AUD, will cycle up and down as time goes by. As long as we have good macroeconomic policies - interest rates and government spending and taxing - and good policies for an orderly and free society, we don't have to stress too much about decisions of the plutocrats to send us money and stuff, or not. Any cataclysms will come from elsewhere, like global warming, oil wars in the Middle East and collisions with asteroids. If we are going to stress about macroeconomics, it should probably be about the state of our tax system, which, despite its delivering revenues, welfare spending and government services, is not economically efficient, equitable or simple to administer.