Do Current Account Deficits/Surpluses Add Up to Zero? Debunking the Myth

Theoretically, the sum of all current account balances across the world should ideally equate to zero, unless there's some clandestine inter-planetary trading involved. However, in real-world scenarios, this isn't the case due to factors such as delayed transaction recording and the prevalence of trade-based money laundering (TBML).

Understanding the Current Account Balance

The current account balance is a fundamental indicator in international economics, reflecting the net balance of a country's external transactions in goods, services, and transfers. It is composed of three major components:

Let's consider a simplified example, where Country A exports oil worth 100 million to Country B, and Country B purchases it for 100 million. If there are no other transactions between the two countries, in an ideal scenario, Country A would record a trade surplus of 100 million while Country B would have a trade deficit of 100 million. However, in reality, the picture is more complex.

Timing of Transaction Recording

One of the primary reasons the sum of all current accounts isn't zero is the timing of transaction recording. Different countries may record transactions at different points in time, leading to discrepancies in the overall balance.

For example, if the oil transaction between Country A and Country B took place on the last day of 2017 (31st Dec 2017) but Country A records the transaction immediately, while Country B, due to bureaucratic delays, records it only on 1st Jan 2018, the transactions would be reflected differently in the 2017 and 2018 accounts. Consequently, 2017 would show a trade surplus, while 2018 would show a deficit, contributing to an imbalance.

The Role of Trade-Based Money Laundering (TBML)

Trade-based money laundering is a significant complicating factor. TBML involves the use of legitimate international trade to disguise illicit financial flows. This practice is so prevalent that it stands on its own as a category in financial regulations.

The financial industry is increasingly tightening regulations to combat money laundering. As the global standards converge and penalties for such activities become more stringent, we can expect to see a reduction in these discrepancies. In time, the world may reach an equilibrium state with a net zero current account balance.

Conclusion

While theoretically, the sum of all current account deficit/surpluses should balance out to zero, practical realities often lead to an imbalance. This is due to delayed transaction recording and the growing influence of trade-based money laundering. As regulations and penalties intensify, these discrepancies are expected to diminish over time, bringing the world closer to a balanced global economic system.