"Currency manipulation places American workers, farmers and businesses at a competitive disadvantage and this Congress will work with the administration to hold trading partners accountable to the rules of trade," said House Trade Subcommittee Chairman Sander Levin (D - MI). (And some readers still wonder why I have such intellectual contempt for most politicians, especially the likes of Levin). The basic problem for the US economy is not an undervalued Chinese currency but monetary policy.

It is still being said that the world is awash with surplus savings. Complete and utter rot. What the world is really awash in is bank-created credit. The idea of surplus savings can be traced back to Jeremy Bentham who had the good sense to drop it once James Stuart Mill explained to him how fallacious it was . It was resurrected in 1829 by Wakefield in his Letter from Sydney.

It was then largely relegated to the margins of economic thought. Later in the century J. A. Hobson tried unsuccessfully to rehabilitate the theory. He did , however, succeed in passing it on to Lenin who then made it part of his absurd theory of imperialism. I think it is therefore fair to label the erroneous idea of surplus savings the Wakefield-Hobson fallacy. So instead of genuine savings we have money flows between countries that are seriously distorting international prices, a process that can badly distort a country's production structure. Now Austrian economics is very strict on the definition of saving, stressing that

Capital formation arises out of the application to productive purposes of that part of income which is saved. The refraining of an individual from consuming part of his income does not of itself lead to capital formation. If there is to be capital formation the postponement of consumption ("waiting" or foregoing of present goods) needs to be supplemented by the creation of means of production ("investment," or production of future goods). In a money economy, when an individual refrains from using part of his money income as present purchasing power and saves it by putting it aside in a stocking or a money box, or by leaving it idle on current account at his bank, capital formation fails to take place, and saving by the individual does not give rise to saving from the point of view of society as a whole. (Fritz Machlup, The Stock Market, Credit and Capital Formation, William Hodge and Company, LTD, 1940, p. 26).

It's clear that these international funds are anything but savings. One argument has it that the deficit is showing that the US economy's production structure is not big enough relative to consumer spending to accommodate the demand for consumption goods. True and irrelevant. No matter how big and sophisticated a production structure is it will always fail to produce sufficient consumer goods to satisfy consumer demand if the central bank has implemented an inflationary policy. Another argument is that the US is running a deficit because it is not saving enough while Chinese savings are massive relative to its GDP. This is a first cousin to the long refuted necessities fallacy.

No matter how strong a desire the Austrians [or Americans] may have for foreign bread, meat, coal or sugar, they can satisfy this desire only if they can pay for them. If they want to import more, they must export more. If they cannot export more manufactured, or semi-manufactured, goods, they must export shares of stock, bonds, and titles to property of various kinds. (Ludwig von Mises, The Manipulation of Money and Credit, Dobbs Ferry, NY: Free Market Books, 1978, p. 36).

It follows from the above that the savings argument collapses once we realise exchange is a two-way street. If America is not saving then by definition it cannot be accumulating capital. If this were case then we would have to consider the possibility of capital consumption. As for Chinese savings: So what? If the Chinese choose to invest a huge chunk of their income, that's their business. What needs to be understood is that no matter how much capital China accumulates, it has no direct bearing on the American production structure: that in turn is the result of US savings, tax, regulatory and monetary policies.

I suppose I must not be too hard on Sander Levin's economic illiteracy considering that Washington is swimming in it. Nevertheless, politicians need to properly inform themselves on economics. A difficult task, I grant you, but a necessary one if Western countries, and the US in particular, are to continue to prosper. Mr Levin could start by considering the role of monetary policy in distorting the pattern of international commerce. And while he is at it, he might also consider how the Chinese economy is also being damaged by loose monetary policies and currency manipulation. Whichever way we turn, therefore, we find ourselves confronted by monetary policy and the nature and role of savings.

Last week I promised to introduce readers to Boyd's Law of Money. And so I shall. In A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issue in Specie at the Bank of England on the Prices of Provisions and Other Commodities Boyd triggered what became known as the Bullion Debate. It was in this letter that Boyd defined money:

By the words 'Means of Circulation, 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation.

Boyd's definition is essential to any debate on monetary policy. If only today's commentators on monetary policy had Boyd's insight.