Posts Tagged ‘National Bookeeping’

If Governments Are To Spend Less, Everyone Else Needs To Spend More.

Saturday, November 26th, 2011

The way a nation’s bookeeping works is that if the government is running a deficit, then someone else has to be running a surplus of the same amount.  The problem can become that those who are running those surpluses simply don’t want to spend or invest their savings.  But in order to reduce government deficits, they have to spend or invest an equal amount–whether they want to or not.

Our response to this hoarding of money (and it is hoarding) is to tax it if it isn’t spent or invested.   ‘Use it or lose it,’ should be the government policy when idle, hoarded cash cannot otherwise be dislodged so that the government can reduce it’s spending and thus it’s deficit.

Martin Wolf explains this very well in a recent Financial Times article.

If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea…..

Net lending – the difference between savings and investment – of all sectors of an economy must add up to zero. If the government is running a huge financial deficit – that is, spending vastly more than its revenue – then other sectors must be spending much less than their income. And so, indeed, they are.

In the second quarter of 2011, the government ran a financial deficit of 9.3 per cent of gross domestic product. Counterpart surpluses were 1.6 per cent of GDP for foreigners (the inverse of the current account deficit), 1.7 per cent of GDP for households and as much as 6.4 per cent of GDP for corporations. The US picture is similar: in the third quarter of 2011, the deficit of government was 9.1 per cent of GDP. Offsetting surpluses were 3.3 per cent of GDP for foreigners, 2.2 per cent of GDP for households, and 3.7 per cent of GDP for business.

Beezer here.  The two largest surplus components are businesses (who are sitting on a couple trillion in cash at the moment) and foreigners who for the most part are paying us to take their surpluses (negative real interest rates) so they can hold these surpluses in safe dollars.  Rather than simply tax away the corporate surpluses, the government could issue billions of dollars in infrastructure jobs which would, in turn, spur matching corporate investment and the so far elusive hiring of the unemployed or underemployed.    This boost in employment will have the additional positive effect of allowing the private, household sector to deleverage.  The more households delever the more this sector can spend and invest.  And believe it or not, if China stopped sending us their surpluses it would help us trim our deficit.   But China can’t do this because this is how they cheat in the currency markets to keep their currency undervalued, and their exports underpriced.  Trade deficits aggravate this problem because they represents domestic spending that is a deduction from GDP and a corresponding addition to foreign economies.  A major source of these trade deficits comes from our importation of foreign oil.  The less we spend on foreign supplied energy, the more we can reduce government deficits.   The recent domestic growth of natural gas production, coupled with continued growth in non fossil fueled energy and more efficient use of all energy (such as that which comes from higher mpg standards for cars and trucks) will have a major, beneficial longterm effect on government deficit reduction and private sector spending and investment. 




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