|Book Launch w/ @AndrewBoyd
HERE'S A BIT OF primer.
If a modern monetary economy is to have either growth or savings it
requires a deficit somewhere.
This is not an opinion, or an ideologically biased point of view. It is
an arithmetic fact based on the what money means in actually existing
The key identities here are the "Sectoral Balances." The "sectors" are
private, public, and international. And the three balances in question
are net private savings, the total amount the private sector, including
households, can save, along with the public balance, that is the amount
the Government taxes minus what it spends, and the "current account
balance," which the balance between imports and exports.
If you sum these three balances the total is always zero. That is
because there is only a limited amount of money in the economy at any
time, and therefore any surplus in one balance must inevitably show up
as a deficit in another.
If economy needs more money, either because it is growing, or because
people or corporations want or need to save more, either the budget
deficit needs to increase or the trade imports need to go down relative
to exports. If neither of these things happen, then neither economic
growth, nor increased saving is possible. This is why if wealth is to
grow, either a government deficit or trade surplus is required. Of
course, the world as a whole can not have a trade surplus. A trade
surplus in any nation, must be offset by a trade deficit in another.
Thus, within a modern monetary economy, the only means for an wealth to
grow in a balanced trade environment is for the Government to run a
In other words, if the private sector is carrying too much debt, this
means the public sector is likely taxing too much or spending too
little. Government needs to increase it's deficit.
Government spending, and also government borrowing is essential for the
functioning of our economy. Back in the year 2000, when the economy was
on over-drive and the US Federal Reserve bank was ratcheting interest
rates in an attempt to cool down an economy it felt was in overdrive,
Scott F. Grannis, Chief Economist of a US asset management firm,
delivered a remarkable paper at the Cato Institute 18th Annual Monetary
Conference, a right-wing affair co-sponsored by the Economist. Grannis,
like other fund managers was terrified. What terrified him was that the
combination of a government budgetary surplus and the fed's tight
monetary policy would result in a scarcity of government treasuries.
It's worth quoting him.
Grannis argues "The world needs Treasuries, and would be worse off
without them. They are a public good just like our justice system, our
national defense, and our network of interstate highways. [...] We
would be foolish to pay down the national debt." Although Grannis
interest are ultimately self-serving, the preservation of a risk-free
investment, his point holds true. Bill Mitchell reports a similar
situation taking place on Australia, during a period of budgetary
surplus the government wanted to "pay down it's debt," and the financial
industry went ballistic, for fear of a scarcity of risk-free Treasuries
to hold in their portfolios.
Money, like Treasuries, is simply a form of Public debt. The fact is
that Public debt, no matter if it's in the form of accounts, currency or
treasuries, is the basis of the modern monetary economy. We'd all be
broke without it. Money enters the economy as government spending, and
exits the economy as tax payments. If the government has a balanced
budget, no extra money remains in circulation, and there can be no
increase in private savings. If the Government has a budgetary surplus,
this means that private wealth is decreased.
For this reason, as Grannis says, "Debt is a Public Good," in the same
way the infrastructure such as roads create the capacity for transport,
government debt creates the capacity for commerce. Fiscal policy should
never be interpreted from the budgetary balance alone, but must always
keep the Sectoral Balances in mind. The government must spend enough to
ensure that scarcity of its's debt does not strangle the economy, which
almost always means it must spend more than it taxes, if it fails to do
so, then the result would either be economic stagnation or global trade
imbalances. As we can see from the words of Scott F. Grannis, the
bankers know this.
While public debt is a public good, private debt is a burden, often a
crippling one. A sensible fiscal policy would be to use government
spending to reduce private debt, especially household debt.
Understanding the way the Sectoral Balances function is key to
understanding what is going on in the economy today. For instance,
austerity measures reduce the government deficit, which in turn reduces
private sector savings, or rather, increases private sector debt.
Imbalances of political power within the private sector, for example
between corporations and household, mean that the burden of this debt
mostly born by households. The only way to reduce such household debt is
either increase corporate debt or increase public debt, or decrease
trade deficits. This not only explains why household debt is exploding,
but also explains the Euro crisis. Germany has a large trade surplus,
thus other countries, like Greece have a trade deficit. If the Euro is
to be stable, Greece can only decrease its trade deficit if Germany
increases its budgetary deficit. Somethings got to give.
Organizing around debt means uniting against insane policies that
promote the interests of rich corporations and rich countries against
common households and poorer countries. Much of the debt born my
households and the debt born by peripheral nations is a result of bad
government and bad economic policy.
To quote The Debtors' Song:
If us debtors get together,
all together, every one
we can heal, and house and teach each other
and do the work that must be done.
Them creditors, they don't help us none,
they just get in the way,
their profits are what drags us down,
we must refuse to pay.