Households Vs Nations

[tomandlu]

Bear of small brain again...

If I was being simplistic and naive, I would compare a nation's finances to a household's. Spending a little more per month than your income at Christmas or on holiday is okay, or spending on a sudden emergency, as long as you spend less than your income to make it up during the rest of the year. This is a sort-of Keynesian approach to the household budget.

However, if I was consistently spending more than my income, and as a consequence eating up my savings bit by bit, I'd probably worry. In addition, if my savings were long gone and I was now just getting more and more into debt each month, I'd know something was seriously wrong with the household finances.

Now, obviously a household is a complicated thing. My children don't bring in any income and cost me quite a lot. They want game-consoles and nice clothes (and food - oh God, the food). They are, in a sense, and along with the cat, the benefit claimants in my household. They don't seem particularly grateful (and the cat is positively vicious), so I think they're doing a pretty good impression. Likewise, my wife spends more than she earns, but she does the laundry and the bulk of the cooking, so she's like the public sector and is providing a service to the rest of the household. Nevertheless, we basically keep within our budget.

So... why do economists think it's different for countries? How can any economist claim with a straight face that a growing debt and a growing or steady deficit is acceptable? How can a country consistently spend more than it earns without this implying something is wrong with that nation's finances?

Possible explanations:

• Fringe benefits to the rest of the world - i.e. think public sector but on an international scale (e.g. the US as the world's policeman or something*)
  
• I'm missing some intrinsic difference between a household and a nation
  
• The overspend is definitely, absolutely going to shrink as soon as that thing we're spending it on comes online (fantastic education, cold-fusion, whatever - something that pretty much guarantees future prosperity)
  
• The economists are wrong
  

Anyway, anyone got any insight? What have I misunderstood?

* for many reasons, this is a poor example, but LIS...

[punter]

most economists are connected to the big banks and the state and they will do anything to keep their scams going

the state has a central bank, they can debase the currency and rip off the common man for the benefit of themselves and their connected friends

The whole apparatus of state is setup to rip us off and the gatekeepers, media, economists etc. will do anything to protect them

[Lennon]

Bear of small brain again...

If I was being simplistic and naive, I would compare a nation's finances to a household's. Spending a little more per month than your income at Christmas or on holiday is okay, or spending on a sudden emergency, as long as you spend less than your income to make it up during the rest of the year. This is a sort-of Keynesian approach to the household budget.

However, if I was consistently spending more than my income, and as a consequence eating up my savings bit by bit, I'd probably worry. In addition, if my savings were long gone and I was now just getting more and more into debt each month, I'd know something was seriously wrong with the household finances.

Now, obviously a household is a complicated thing. My children don't bring in any income and cost me quite a lot. They want game-consoles and nice clothes (and food - oh God, the food). They are, in a sense, and along with the cat, the benefit claimants in my household. They don't seem particularly grateful (and the cat is positively vicious), so I think they're doing a pretty good impression. Likewise, my wife spends more than she earns, but she does the laundry and the bulk of the cooking, so she's like the public sector and is providing a service to the rest of the household. Nevertheless, we basically keep within our budget.

So... why do economists think it's different for countries? How can any economist claim with a straight face that a growing debt and a growing or steady deficit is acceptable? How can a country consistently spend more than it earns without this implying something is wrong with that nation's finances?

Possible explanations:

• Fringe benefits to the rest of the world - i.e. think public sector but on an international scale (e.g. the US as the world's policeman or something*)

• I'm missing some intrinsic difference between a household and a nation

• The overspend is definitely, absolutely going to shrink as soon as that thing we're spending it on comes online (fantastic education, cold-fusion, whatever - something that pretty much guarantees future prosperity)

• The economists are wrong

Anyway, anyone got any insight? What have I misunderstood?

* for many reasons, this is a poor example, but LIS...

The classical economists answer is that as a household you have a defined end point - your kids will leave home, your cat will pass on, and you will stop working. By contrast a country always has a tommorow and has both earners and claimants in the future.

[tomandlu]

the gatekeepers, media, economists etc. will do anything to protect them

This is the bit of that explanation I have a problem with. It requires a conspiracy that seems at odds with both logic and observation. Also, debasing the currency may reduce the real value of debt, but it doesn't remove it. Why are national debts and deficits acceptable in the first place? It's like saying "well, we're going to let the lions and tigers out of their cages, but don't worry because we've got some guns to shoot them with when they start attacking you..."

[Bloo Loo]

This is the bit of that explanation I have a problem with. It requires a conspiracy that seems at odds with both logic and observation. Also, debasing the currency may reduce the real value of debt, but it doesn't remove it. Why are national debts and deficits acceptable in the first place? It's like saying "well, we're going to let the lions and tigers out of their cages, but don't worry because we've got some guns to shoot them with when they start attacking you..."

Countries can and do go bust.

Its a myth to say countries are different to a much smaller entity. The maths applies to them as it does to everything else.

[tomandlu]

The classical economists answer is that as a household you have a defined end point - your kids will leave home, your cat will pass on, and you will stop working. By contrast a country always has a tommorow and has both earners and claimants in the future.

Ah, okay... although that could stand as an argument for the opposite. Overspend now as a household, because things will be cheaper once the kids leave and the cat dies... and countries/economists don't seem to have a problem with perpetual debt (and a perpetual and growing deficit doesn't seem to worry them that much either). What on earth do they think is going to change that's going to transform that into a balanced budget?

I dunno - it's just seems weird...

[tomandlu]

Countries can and do go bust.

Agreed - so why do economists not condemn, en bloc, attitudes to a country's finances which make this more likely?

[DeepLurker]

The classical economists answer is that as a household you have a defined end point - your kids will leave home, your cat will pass on, and you will stop working. By contrast a country always has a tommorow and has both earners and claimants in the future.

If I can rephrase the above? You're saying that a nation is like a household - but in a country where your children inherit your debts as well as your wealth?

[Bloo Loo]

Agreed - so why do economists not condemn, en bloc, attitudes to a country's finances which make this more likely?

would you employ a salesman who said your products wont work very well in a months time?

[Lepista]

This isn't my argument,but is increasing debt OK with increasing GDP (i.e. %age stays the same)?

[tomandlu]

This isn't my argument,but is increasing debt OK with increasing GDP (i.e. %age stays the same)?

I suppose if you're happy with some structural debt then that makes sense... get's a bit iffy when the only reason your GDP is going up is because of the debt...

[leicestersq]

Bear of small brain again...

If I was being simplistic and naive, I would compare a nation's finances to a household's. Spending a little more per month than your income at Christmas or on holiday is okay, or spending on a sudden emergency, as long as you spend less than your income to make it up during the rest of the year. This is a sort-of Keynesian approach to the household budget.

However, if I was consistently spending more than my income, and as a consequence eating up my savings bit by bit, I'd probably worry. In addition, if my savings were long gone and I was now just getting more and more into debt each month, I'd know something was seriously wrong with the household finances.

Now, obviously a household is a complicated thing. My children don't bring in any income and cost me quite a lot. They want game-consoles and nice clothes (and food - oh God, the food). They are, in a sense, and along with the cat, the benefit claimants in my household. They don't seem particularly grateful (and the cat is positively vicious), so I think they're doing a pretty good impression. Likewise, my wife spends more than she earns, but she does the laundry and the bulk of the cooking, so she's like the public sector and is providing a service to the rest of the household. Nevertheless, we basically keep within our budget.

So... why do economists think it's different for countries? How can any economist claim with a straight face that a growing debt and a growing or steady deficit is acceptable? How can a country consistently spend more than it earns without this implying something is wrong with that nation's finances?

Possible explanations:

• Fringe benefits to the rest of the world - i.e. think public sector but on an international scale (e.g. the US as the world's policeman or something*)

• I'm missing some intrinsic difference between a household and a nation

• The overspend is definitely, absolutely going to shrink as soon as that thing we're spending it on comes online (fantastic education, cold-fusion, whatever - something that pretty much guarantees future prosperity)

• The economists are wrong

Anyway, anyone got any insight? What have I misunderstood?

* for many reasons, this is a poor example, but LIS...

There isnt any difference really.

The only nuance I can think of is that you assume that you are on a fixed income. You are not really, even if it has been static for a few years.

Governments too have variable incomes, as their economies grow. Their borrowing has historically, been a fraction of their income, say 1 or 2 percent of the total income of the nation. Now as long as the economy is growing faster than that extra debt, then the debt to income level is actually falling. Debt to income levels are a good way of measuring indebtedness.

In the last few years, our debt has been climbing at an alarming rate, thanks to the huge deficit. I think that the deficit is something like 10% of GDP. If a person earning £30k borrowed £3 in one year, it wouldnt seem like so much of a problem. Trouble is, they have £18k of debts already, so you reach a point where the interest bill starts to hurt.

Now, I leave it to you to think of the problems that you would have repaying, if your income starts to fall. This is the issue underlying the debt crises in Europe, it isnt just the banking crises. Thanks to demographics, more and more people are retiring, meaning states are not only facing bigger social bills, but also, thanks to the reduction in the workforce, facing falling income as well.

Bondholders are running for cover.

It would be well for us to learn the lessons being taught to us by the PIGS, and do a bit of proper belt tightening of our own before the storm hits the UK.

[scepticus]

There isnt any difference really.

yes there is. household liabilities are not used as money.

since money is not neutral, this makes the two totally different.

further, nations can raise revenue through compulsion, and households can't.

[Bloo Loo]

yes there is. household liabilities are not used as money.

since money is not neutral, this makes the two totally different.

further, nations can raise revenue through compulsion, and households can't.

MBS. CDO. any loan.

[Bloo Loo]

This isn't my argument,but is increasing debt OK with increasing GDP (i.e. %age stays the same)?

no, because debt is a part of the GDP calc.

You could have no industry at all, and GDP could still grow with simply printing money and having the Government spend it.

[Kyoto]

Kids as benefit claimants and the wife as the public sector. I like it!

[Lennon]

Obviously the big difference that we have (but Ireland for example doesn't have) is that the nations debts are denominated in something that the country has power over the value of... Try persuading a mortgage company that you want to borrow 'Injin Dollars' which you have the power to change the value of...

[leicestersq]

Obviously the big difference that we have (but Ireland for example doesn't have) is that the nations debts are denominated in something that the country has power over the value of... Try persuading a mortgage company that you want to borrow 'Injin Dollars' which you have the power to change the value of...

The market does indeed lend 'Injin Dollars'. The level of trust in the transaction though, depends on the level of trust in the 'Injin Dollar' to hold its value. The less the market trusts it to do that via restricted supply, then the higher the rate of interest it will demand.

[The Spaniard]

.So... why do economists think it's different for countries? How can any economist claim with a straight face that a growing debt and a growing or steady deficit is acceptable? How can a country consistently spend more than it earns without this implying something is wrong with that nation's finances?

I assume that you are talking about the state’s deficit and debt here, rather than an ongoing national balance of payments trade deficit with the rest of the world.

One important factor is that the state has handed over the essential function of providing a national means of exchange to commercial banks. The state can no longer issue and spend directly into circulation the national currency.

Politicians then borrow and spend to bribe the electorate. Short termism rules. The National Debt is rationalized to be OK at a certain percentage of GDP. State spending is characterized as “investment”. Spin rules.

The nation is no longer in any real sense autonomous or sovereign. It is in thrall to the money markets. Witness now our politicians being totally ineffectual about bank bonuses.

Watch Bill Still’s The Secret of Oz for the history of the battle for control of the US currency.

[Lepista]

no, because debt is a part of the GDP calc.

You could have no industry at all, and GDP could still grow with simply printing money and having the Government spend it.

But then the debt:gdp ratio would be increasing.

[exiges]

The OPs analogy is great fun.

Can he also print his own money ?

[Lepista]

The OPs analogy is great fun.

Can he also print his own money ?

If you can print your own money, why are you in debt?