Politicians promise Japan will invest $550 billion in America while we run trade surpluses with Japan. It sounds new, but your great-great-grandfather heard the same promise.
This is the economic equivalent of a perpetual motion machine – it sounds amazing until you remember that energy has to come from somewhere.
In 1890, Congressman William McKinley had a brilliant idea: raise tariffs to keep foreign goods out, create American jobs, and watch trade surpluses roll in. Voters loved it. The plan lasted four years before being rolled back in 1894.
The problem wasn’t the politics – it was the plumbing. America was building railroads and factories using foreign money. Those foreign investors needed dollars to buy American assets. Where do foreigners get dollars? Mostly by selling stuff to Americans.
McKinley’s tariffs made foreign goods more expensive, but they couldn’t eliminate the basic requirement: if you want foreigners to invest in your country, those foreigners need your currency. They get your currency by selling you things. It’s like trying to get a loan from your neighbor while refusing to buy anything from their garage sale. The money has to flow somehow.
(The math: Current account + financial account ≈ 0. For any bilateral relationship in the same period, you can’t be both net borrower and net lender using the same money.)
European kings tried the same thing for centuries. “Export everything, import nothing, get rich” was the official policy from Spain to France to Britain. Economists call it mercantilism, but think of it as the original “something for nothing” scheme.
Spain conquered the Americas and shipped home tons of gold. Great plan, except Spain still needed things it couldn’t make efficiently – cloth, tools, food. All that American gold flowed right back out to buy stuff from other countries. The harder Spain tried to hoard gold while buying foreign goods, the faster the gold disappeared. It’s like trying to fill a bucket with a hole in the bottom – you can pour faster, but physics doesn’t care about your enthusiasm.
A Scottish philosopher named David Hume figured out why in the 1750s. More gold meant higher domestic prices in Spain, which made Spanish goods expensive compared to foreign alternatives. As price levels adjusted, the “solution” created the problem it was trying to solve.
Britain eventually got smart about this. Instead of trying to hoard money, they accepted the ledger: they often ran goods deficits while generating current account surpluses from services and investment income, then exported capital on a massive scale. They didn’t escape the math – they used it to become wealthy.
Every generation thinks technology changes the rules of arithmetic. The 1890s had telegraphs and railroads. We have smartphones and satellites. But if you want foreign money to invest in your country, those foreigners still need your currency, and they still get it mostly by selling you stuff.
The promise sounds sophisticated now: “foreign direct investment” instead of Spanish gold, “trade policy” instead of royal decrees. But it’s the same mathematical impossibility dressed up in modern language. Think of your household budget. You can’t simultaneously be your neighbor’s biggest creditor (they owe you money) and their biggest debtor (you owe them money). One relationship cancels out the other.
Countries work the same way, just with more zeros and fancier titles for the people making the promises.
July’s numbers tell the familiar story. Americans bought $18.6 billion more in goods (advance report) despite all the tariff talk. Not because consumers hate America, but because the government borrowed money that had to come from somewhere. Meanwhile, bond auctions showed strain – yields cleared higher than expected and bid-to-cover ratios weakened as financing needs bump against market capacity. The system still works, but it’s getting more expensive.
Same pattern as McKinley’s tariffs and Spanish gold: the math eventually wins, but politicians keep hoping this time will be different.
Understanding this pattern helps you spot promises that sound too good to be true, whether from politicians, financial advisors, or anyone else handling money. When someone promises you’ll get money from two opposite directions simultaneously – borrowing more while lending more, attracting investment while running surpluses, cutting taxes while increasing spending – check if they’re using the same dollars twice.
Most “revolutionary” economic ideas turn out to be 200-year-old mistakes with better marketing. The math hasn’t changed since McKinley’s time, or Hume’s time, or probably since people started trading shells and beads. Money that flows in has to come from somewhere. Money that flows out has to go somewhere.
Politicians count on you not knowing this history. Now you do.
MTWX connects people who recognize these patterns instead of falling for them repeatedly. Instead of hoping this time will be different, we position ourselves according to mathematical relationships that transcend historical periods and political promises.
Ready to learn from history instead of repeating it?
Spotted a “revolutionary” economic policy that sounds suspiciously familiar? Send it to george@mtwx.ca and we’ll check the history books.