SharpFokus Brief
Adam Smith, Trade Surpluses, and the Missing Cashflow
Monday, April 7, 2025
⸻
More and more countries today are celebrated for their large trade surpluses and rising foreign reserves. These are often viewed as signs of national strength—proof of discipline, competitiveness, and sound economic management.
But as far back as the 1700s, Adam Smith—the father of modern economics—warned against this obsession. He called it “nonsensical” to treat a trade surplus as a measure of success, especially if it came at the expense of domestic well-being.
“Consumption is the sole end and purpose of all production,” he wrote.
The goal of trade was not to stockpile wealth—but to improve life at home.
At SharpFokus, we ask a similar question in today’s context:
Where does the cashflow go—and who actually receives it?
Because while trade surpluses and reserve accumulation may reflect macro stability, they don’t always translate into household prosperity.
⸻
The Path of the Cash
When a country runs a trade surplus, foreign currency flows in. To manage this, central banks often:
• Print local currency to buy foreign currency
• Hold the foreign currency in reserves—often invested abroad
• Absorb the local money to control inflation
This process supports exports and stabilizes the exchange rate, but it can also lead to something more subtle:
The money doesn’t circulate through the domestic economy.
Goods and labor leave the country.
Dollars are stored abroad.
Local currency is sterilized or absorbed by the financial system.
The result? Households see little change.
Wages remain flat.
Consumption lags.
Small businesses don’t feel the benefit.
⸻
When External Demand Shapes Internal Policy
Modern economic frameworks often treat exports as a positive and imports as a negative, but that framing can be misleading.
Imports support domestic consumption. Exports reflect external demand.
When national strategy targets trade surpluses above all else:
• Imports are discouraged
• Wages are restrained to stay “competitive”
• Foreign cash is stored, not spent
And yet, it is the household—not the headline—that reflects whether the economy is truly working.
After all, the word economy comes from the Greek oikonomia—the management of the household.
⸻
From Surplus to Circulation
This Brief isn’t meant to critique export growth or reserve policy.
It’s meant to ask a deeper question—one central to the SharpFokus method:
Does capital flow back to the people who created it?
Or is it stored, redirected, or sterilized before it ever reaches them?
Just like we analyze companies by comparing cashflow to long-term outcomes, we can ask the same of economies:
• What came in?
• What was retained?
• What was returned?
Because no matter how strong a trade surplus looks, it must ultimately be felt at home.
We explore this same issue at the company level—how reported profit can differ from real cashflow, and how that shapes future decisions—in the SharpFokus Short Cashflow Course.
You can start here:
Introduction to the Course
Adam Smith, Trade Surpluses, and the Missing Cashflow
Monday, April 7, 2025
⸻
More and more countries today are celebrated for their large trade surpluses and rising foreign reserves. These are often viewed as signs of national strength—proof of discipline, competitiveness, and sound economic management.
But as far back as the 1700s, Adam Smith—the father of modern economics—warned against this obsession. He called it “nonsensical” to treat a trade surplus as a measure of success, especially if it came at the expense of domestic well-being.
“Consumption is the sole end and purpose of all production,” he wrote.
The goal of trade was not to stockpile wealth—but to improve life at home.
At SharpFokus, we ask a similar question in today’s context:
Where does the cashflow go—and who actually receives it?
Because while trade surpluses and reserve accumulation may reflect macro stability, they don’t always translate into household prosperity.
⸻
The Path of the Cash
When a country runs a trade surplus, foreign currency flows in. To manage this, central banks often:
• Print local currency to buy foreign currency
• Hold the foreign currency in reserves—often invested abroad
• Absorb the local money to control inflation
This process supports exports and stabilizes the exchange rate, but it can also lead to something more subtle:
The money doesn’t circulate through the domestic economy.
Goods and labor leave the country.
Dollars are stored abroad.
Local currency is sterilized or absorbed by the financial system.
The result? Households see little change.
Wages remain flat.
Consumption lags.
Small businesses don’t feel the benefit.
⸻
When External Demand Shapes Internal Policy
Modern economic frameworks often treat exports as a positive and imports as a negative, but that framing can be misleading.
Imports support domestic consumption. Exports reflect external demand.
When national strategy targets trade surpluses above all else:
• Imports are discouraged
• Wages are restrained to stay “competitive”
• Foreign cash is stored, not spent
And yet, it is the household—not the headline—that reflects whether the economy is truly working.
After all, the word economy comes from the Greek oikonomia—the management of the household.
⸻
From Surplus to Circulation
This Brief isn’t meant to critique export growth or reserve policy.
It’s meant to ask a deeper question—one central to the SharpFokus method:
Does capital flow back to the people who created it?
Or is it stored, redirected, or sterilized before it ever reaches them?
Just like we analyze companies by comparing cashflow to long-term outcomes, we can ask the same of economies:
• What came in?
• What was retained?
• What was returned?
Because no matter how strong a trade surplus looks, it must ultimately be felt at home.
We explore this same issue at the company level—how reported profit can differ from real cashflow, and how that shapes future decisions—in the SharpFokus Short Cashflow Course.
You can start here:
Introduction to the Course