Sunday, May 31, 2015

Update on Russian Economy

The good news. The deficit is growing, although Gurdgiev interprets this as bad news.

True Economics
31/5/15: Russian Fiscal Performance: Red Alert in Jan-Apr 2015
Constantin Gurdgiev

Daily life becoming more difficult economically, but Russians are resilient.

Une parole franche
Letter from St Petersburg
Gilbert Doctorow, Ph.D.


Septeus7 said...

Isn't growth in the deficit only good if the underlying physical capacity can properly absorb the new financial assets? I don't know if this new money will end up in raising living standards or if it will simply be pumping into the Oil and Gas export economy which longer term is a real loss. Am I wrong in my skepticism?

Matt Franko said...

Its an indicator of lack of confidence .... ie people are saving... in an electrical analogy it is an increase of thermal loss ie an indicator of inefficiency. .. an increase of the deficit is not a good sign... people who think an increased deficit is a good thing would suggest pointing a hair dryer at an electric motor to heat it up would somehow increase motor output... its not insightful. .. its a primitive view...

Jose Guilherme said...

When people save more the economy contracts and the deficit increases - but this increase attenuates the size of the contraction.

The deficit is working here as an automatic stabilizer.

Of course, it would be preferable if the deficit increased as a result of proactive, counter cyclical fiscal policy. In that case the deficit - if large enough - could compensate for the effects of the extra savings and prevent or overcome a contraction of the economy.

Matt Franko said...

J it can't be the deficit the deficit is ex post it has to be the increased spending which is the act which leads to stabilization. ... deficit may go up or down ... govt spends first and then collects the taxes...

Think of a motor circuit; you increase the speed of the motor and it gets warmer (thermal loss increases) and so does output but it is not the fact that the motor got warmer that has increased the output... increase of thermal loss is just a coincident result or correlation not the causal factor..

Increased Govt spending is what is causal not coincident savings of non govt...


Jose Guilherme said...

The private sector saves more, spends less and this changed behavior causes a contraction of the economy.

However, as the economy (and income) is contracting, tax receipts inevitably decrease - and automatic budget spending on items such as unemployment benefits, food stamps etc. increases.

We thus observe an increased budget deficit that dampens the contraction caused by more private sector saving.

It´s all automatic stabilizers at work; as a rule, the higher the marginal tax rates and unemployment benefits the larger the stabilizing effect on GDP.