The received wisdom on government debt is that it saddles future generations with the burden of repayment. The received wisdom is wrong. As long as a government’s debt is denominated in its own currency, repayment is never a problem. Why? Because the government can always create the necessary funds.
A sovereign government’s debt is one source of a country’s currency. National governments literally spend money into existence.
Deficits can cause problems, but to properly understand those problems, we have to understand the role that government finance plays in a country’s monetary system....The Conservation
How government deficits fund private savings
D.T. Cochrane | Lecturer in Business and Society, York University, Canada
3 comments:
Dear idiots, government deficits do NOT fund private savings
Comment on D.T. Cochrane on ‘How government deficits fund private savings’*
D.T. Cochrane argues: “Changes in the financial assets of the government and the private sector mirror each other. Government debt equals private sector financial assets, by definition. When the government posts a deficit, the private sector’s financial assets increase. When the government posts a surplus, the private sector’s financial assets decrease. In other words, when the Canadian Taxpayers Federation hauls out their debt clock, showing the federal government’s increasing debt, they are also showing the private sector’s increasing financial wealth.”
This is not correct and the reason is that D.T. Cochrane is too stupid for the elementary mathematics that underlies macroeconomics.
Here is the correct macroeconomics in a nutshell.
(i) The elementary production-consumption economy is given by three macroeconomic axioms: (A1) Yw=WL wage income Yw is equal to the wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
(ii) The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. X=O.
(iii) The monetary profit/loss of the business sector is defined as Q≡C−Yw,
(iv) The monetary saving/dissaving of the household sector is defined as S≡Yw−C.
(v) Ergo Q+S=0 or Q=−S.
The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q=−S is the elementary version of the macroeconomic Profit Law.
For a start, we have only two sectors: the household and the business sector. The surplus of the business sector, i.e. profit, is the exact mirror image of the deficit of the household sector, i.e. dissaving. The deficit of the business sector, i.e. loss, is the exact mirror image of the surplus of the household sector, i.e. saving.
Now, the government sector is brought into the picture.
See part 2
Part 2
The complete macroeconomic Profit Law is given by Q=Yd+(I−S)+(G−T)+(X−M). In order to focus on the interactions between household, business, and government sector, it is here reduced to Q=−S+(G−T). Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes, (G−T)>0 government deficit.
If the government’s budget is balanced, i.e. G=T, and if the households dissave then the business sector makes a profit, i.e. Q is positive.
If the government’s budget is balanced and the households save, i.e. S≡Yw−C>0, then the business sector makes a loss, i.e. Q is negative.
If the government’s budget deficit, i.e. (G−T)>0, is equal to the household sector’s saving, i.e. (G−T)=S, then macroeconomic profit Q is zero.
If the government’s deficit is greater than household sector saving, then the business sector makes a profit.
If the household sector’s saving is zero, i.e. S=0, and the government deficit is greater than zero, i.e. (G−T)>0, then it holds Q=(G−T), i.e. business sector profit equals government deficit, in other words, Public Deficit = Private Profit.
So, there are two limiting cases, (i) government deficit equals household sector saving, (ii) government deficit equals business sector profit.
There is NO such thing as ‘government deficit equals private saving’ or “government deficits fund private savings”.
Whether the term “private savings” is introduced because of terminological sloppiness or intentionally in order to hide the fact that a government deficit is a free lunch for the Oligarchy to the extent that the public deficit is greater than household sector saving. The word profit does not appear once in D.T. Cochrane’s article.
For the simplified case, i.e. Yd, (I−S), (X−M)=0, financial wealth of the Oligarchy is the exact mirror image of public debt (currently $22 trillion). In this limiting case, the (net) financial wealth of WeThePeople is exactly zero. The talk of “private” financial wealth obscures the distributional reality.
It holds in any case that MMT is either a blunder or a fraud and that MMTers are either stupid or corrupt.
Egmont Kakarot-Handtke
Please don't feed the troll or rattle the bars of its cage.
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