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Public deficit=private savings

30/05/2012

http://www.economonitor.com/blog/2012/05/why-cant-people-understand-national-accounting/#idc-container

Rightly said,  “public deficit=private savings”, but then you have several problems you did not mentioned.
1) Whole your model speaks about Cash flow and “Public Deficit= Private Savings”, what about the balance sheet? The depletion of the asset value, caused by wrong investments?
2) What if the private savings is external of your currency region The government may lose its independence to regulate trade deficit.
3) To much “deficite-savings”, “Reduces the Currency Value=Depreciation of the currency”. It can be visible as inflation and currency depreciation or hidden, as the mountains of government reserves hold by foreign governments. (US government bonds in Chinese+Japanese safes).
4) Rightly said by LCR, the US has not only public deficit but also negative private savings. How is it possible according to your model? Probably;
a. Point 3) above
b.US economy creates continuously new asset values, that are commercialized to  investors many of them foreign, like new start-ups publicly traded  companies. This of course causes huge inequality in the income. This is why has the US economy the biggest inequality in income in the western world and not so much because of the tax system. I would say in contrary, in Europe my be the tax legislation more progressive than in USA, but the tax leakage is so common, (because of the independence of tax collection of each individual country, including Lichtenstein, Cyprus. etc.) that it is hard to speak about progressive tax collection at all.
c. The real estate market of USA is continuously creating new values, because of growing population and growing economy. From while to while (lately every 20 years) this market collapses, and erases the private investors asset values, reducing by it the public debt too, since “Reduced Asset Value= Reduced Liquidity”, and the government can supplement this lack of liquidity by printing money, and that’s what is happening now in USA and gradually in Europe too.

The conclusion;, at the end of the party the bill has to be paid. How the USA will pay its bill for 35 years of public deficit and reduced private savings? Probably by inflation or currency depreciation or both, or if we are lucky with some NewApple company shares or pieces of real estate.

13 Comments
  1. Yes. You see this effect on GDP but the equality
    (FISCAL DEFICIT -TRADE DEFICIT ) = NET PRIVATE SAVINGS
    is still exactly true.
    Partha.

    • I would make a small correction. 
      In its monetary form:
      Fiscal deficit is = the annual government expenditure -minus- annual government income from taxes, profits from its assets and Central banks profits or losses, = is eqivalent to annual government debt created by the government (or money newly printed), that on the private sector becomes a saving unless consumed. Yet when this printed money becomes saving and is deposited to the banks, it multiples with bank borrowings several times, and out of this newly created money new saving is generated. So the total private savings in the banks exceeds several folds the total accumulated money printed by government due to deficite.
      Trade deficit is = annual total products, (merchandises, investment activities and services) sold out or exported from certain currency region to other currency region. (The Greek debt to Germany as to this definition is not accumulated trade deficit but rather normal commercial activity between greek government as a private entity and private German banks, that mistakenly thought that the German government stands behind these debts.) Minus – annual total products imported or sold out of the region. Interestingly interest and dividents payed or received from other currency region is part of the trade deficit, as certain form of service product. So the monetary values in the economy are not entirely neutral when calculating the trade deficit.
      Net accumulated private savings in its non monetary form = equals the total accumulated products produced and not consumed or investments in other words – minus the trade deficit which is a debt so is reduced from the aggregate net savings in the currency region level. Interestingly all this nonmonetary savings can incuded accumulated not consumed services, like, education, health, insurance deposits, pension and other form of long term savings, that will enable in the future to be exchanged with products for immediate consumption.
      Conclusion, accumulated savings in form of money that is different from total accumulated wealth, (which includes also total assets intangible and non intanangible, without bank deposits and receivables), is equivalent to total accumulated government deficit saved and not consumed, multiplied by the bank system at maximum rate of the multiplier. It has to be said the saving has its liability sude in form of debts, either to a government or to a private entity.

  2. Historically, GDP increases with deficit by an incremental slope between +8 and +3 but in recent times (near 2008) it is actually negative showing something is seriously wrong. I interpret is wasted money for gambling etc. This data is in wordpress.com/pshakkottai and I couldnt open the files because they are either corrupted or my ipad cant open them. You can read the description if the graphics wont open. I will try to restore them.
    Partha

    • ::)As I read more and more your economic views, I come to the conclusion, that when we speak about economy on national level, you and me, we look on economics from entirely opposite point of view. You see economy as flow and accumulation of money, and I see it as flow and accumulation of products. To you national wealth is agregative accumulated money, to me it is agregative accumulation of products.
      I have to add here my definition of product: “Product is everything created by human activity, that can be consumed or accumulated for future consumption, direct or indirect (indirect; means product still in process or tool for usage to produce another product at present or in future). Product can be for self use or transferred to others. Then the tool used for this  transaction of product is money (at least so it is in modern economy).”
      I will try to explain this view of mine.

      Money is a tool that copies certain parts, even if the most significant part of economy, but not all of it. For example, if someone publishes a new article in here/his blog and teaches or pleases someone, she/he produced a product, and still there will be no exchange of money for it. This part of economy is taking more and more significant part in the modern economy. There is a whole new economic theory explaining this trend by Jeremy Rifkin.
      Viz link:
      http://www.thezeromarginalcostsociety.com/

      If you look at economics of an individual, his economic activity, be it production, consumption or savings, copies almost entirely exchange of money. But on national level it is not so. If an individual’s monetary savings was translated by someone else to product, mainly investment product, but sometimes just by using borrowed money to immediate consumption, money will represent one to one this economic activity. Since it is easier to calculate the money volume value than the product volume value, the economic activity is usually represented in form of money. From here comes National income=N ational product. Still it doesn’t mean that money is the real economic value created.
      To prevent double calculation, you will never use in measurement of GDP other tool than money. The result of this is that economic activity, without money exchange, will not be calculated as part of GDP. It also means that when in an economy nothing else changes except decrease of product price, the GDP of such an economy will decrease too, even if the level of wealth has not changed (actually this is what is happening in last years in Japan). Of course there are tools to calculate annual change of GDP in real economic terms, where the price change is neutralized, but in absolute terms the GDP was changed just because of price change of the product. The absurdity of such an accounting system is that when the prices drop due to development of technology, the GDP drops too. Luckily the new technologies create also new paradigm changing products, like mobile then smart phones, or new communication systems, that will add to the national accounting new values. Take for example electricity versus phone companies. 20 years ago, these two business activities couldn’t be compared as to volume they represented in the GDP. If you can recollect, your personal bills to phone companies compared to electricity companies, you will immediately see the huge change in proportions of this two items in your bills, but also in your life. And this did not happened because you reduced your electricity consumption, in contrary, it grew in absolute terms too.

  3. “The conclusion;, at the end of the party the bill has to be paid. How the USA will pay its bill for 35 years of public deficit and reduced private savings? Probably by inflation or currency depreciation or both, or if we are lucky with some NewApple company shares or pieces of real estate.”

    No. Deficit has become wealth at the end of 35 years. Red area = Blue area +or – green area.
    Created money + labor+ materials + talent = real material wealth. Money is only a “token for the ride”!

    • I agree, the U.S. public deficit with low saving rates creates huge US debts to foreigners. This is balanced by selling green papers ($) all over the world, but also US assets. If those assets were newly created it is ok. But if not at the end US economy will be run by the foreigners. But let’s not forget, that US is a magnet to the world wealthiest people and also the most talented ones. So to predict what will really happen to it’s economy is quite pretentious.

      • The same balance applies to poor India, also a monetary sovereign. Again India’s wealth is the sum of its ( fiscal deficit- trade deficit) with the miserable exchange rate $1 = Rs 60. Whether foreigners will own much of Indian economy remains to be seen.

  4. The full equation for a monetary sovereign is
    FISCAL DEFICIT – TRADE DEFICIT = PRIVATE SAVINGS – PRIVATE INVESTMENTS
    = NET PRIVATE SAVINGS and data shows this equality in

    https://pbs.twimg.com/media/BWeTDJKCAAAGeuQ.jpg:large

    See the symmetry of this plot. At low trade govt deficit in red plotted positive downward is equal to private saving in blue positive upward. Trade modifies this as indicated in green, the balance as in the equation above.
    USA data does not show much inflation. As long as labor is available, inflation is believed not to occur. So money can be created for all public purposes till labor shortage is incipient. At that point interest rates can be increased or reduce the creation of money.
    Partha

    • To my understanding,:
      A. private saving – fiscal deficit=net savings.
      Net savings + net borrowings (from domestic or foreign source)=total investment.
      In the US economy net saving is negative, so it is balanced by net borrowings from foreign source. The domestic debt is not significant, since it can be repaid by new taxes, inflation etc. Since the US dollar is used as currency out of US, it can be seen as export item, and then maybe the US borrowings from foreign source are not so bad after all.
      B. Labor is not the only limiting factor in the production. Some raw material can be also, or lack of entrepreneurship, etc. So connecting money supply only to labor can be sometime mistake, like it happened in seventies and eighties, and then you have stagflation.

      • In the equality as expressed above, taxes and borrowings are absent. Bank transactions net to zero because one man’s loan is another’s saving (except for interest). Only the fiscal deficit counts as income to the macro economy and eventually contributes to wealth. The source for wealth is (FISCAL DEFICIT – TRADE DEFICIT) and not federal taxes and bank borrowings. If they were involved the symmetry of the plot would be less precise!
        Partha

        • Fiscal deficit=total government expenses-total taxes. So fiscal deficit includes taxes. Fiscal deficit-trade deficit=total net newly printed money in the domestic market. I am not sure what it means, since money is more created by the commercial banks due to multiply borrowings, than by government. I am not sure if money on national level has much to do with real wealth, maybe with the illusion of wealth. Real national wealth are assets that have potential to create new wealth or economic value of consumption. It doesn’t have to be tangible asset, it can be also education level of population, health, know how, entrepreneurship etc.

          • Deficit=govt spending – govt tax = Fiscal deficit = created money, involves taxes incidentally but what counts is ONLY created money. Taxes can be zeroed out and the economy will run fine. Taxes are entirely unnecessary to fund anything. Govt deficits are supposed to fund public investments like education , infrastructure , healthcare which contribute to wealth of a better informed talented citizenry. Taxing is only required to control inequality which is bad for democracy. Taxes remove money from the economy which is bad.

          • Newly created money not necessarily creates new wealth. If wealth creation is blocked by some obstacle, like monopolies, social disruption, white elephant projects, lack of entrepreneurship, lack of needed professional force, I can continue to write all the obstacles that my stop wealth creation and never get all of them. The capacity to print new money on the other hand is easy and unlimited. So do not fall into the illusion that it is enough to print unlimited amounts of money and the wealth will come by itself.

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