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R K

Govt Surplus = Household Debt To Rise Or Savings To Fall

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Steve Keen on the accounting identity outcome of govt. running a surplus and implications for UK

Its not politics, just basic maths (btw, precisely what OBR say will happen - i.e. household debt to income ratio to rise above prior peak as Osborne cuts spending in next parliament)

Most of you are wrong. Sorry.

h/t Bond Vigilantes for link

http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/

The British election campaign has begun, and Prime Minister David Cameron is running with the slogan that his Conservative Party will deliver “A Britain living within its means” by running a surplus on day-to-day government spending by 2017/18. It is, as the UK Telegraph noted, hardly an inspiring slogan. But it is one that resonates with voters, because it sounds like the way they would like to manage their own households. And a household budget—whether you balance yours or not—is something we can all understand. If a household spends less than it earns, it can save money, or pay down its debt, or both. So it has to be good if a country does the same thing, right?

If only it worked that way. In fact, a government surplus has the opposite effect on Joe Public: a government surplus means that the public has to either run down its savings, or increase its debt. And if the government runs a sustained surplus, then—unless the country in question has a huge export surplus, like Japan or Germany—a financial crisis is inevitable.

That’s the opposite of what both politicians and most of the public think that running a government surplus will achieve—and yet it’s easy to prove that that is the outcome a sustained surplus will lead to.

Firstly, a government surplus means that, in a given year, the taxes the government imposes on the public exceed the money it spends (and gives) to the public. There is therefore a net flow of money from the public to the government. As a once-off, that doesn’t have to be a problem. But if it’s sustained for many years, then the public has to provide a continuous flow of money to the government. Let’s call this flow NetGov: a sustained surplus requires the situation shown in Figure 1 (where a deficit is shown in red and a surplus in black).

Edited by R K

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No mention that if the govt pisses the money on goods/services/gifts abroad then the public sees none of that money.

No mention of the size of this "surplus" in relation to the staggering theft of income in having to live and spend in an asset bubble envirnoment.

No mention that if the govt runs deificits year on year then demands on the public will RISE year on year, if the public that are working in the real world cannot raise their income to match those requirements they are screwed.

No mention of the debt repayments that need to be made on the money "given" to the public by the goverment when they run surpluses.

No mention whether the govt are spending or distributing that money fairly or wisely.

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Steve Keen on the accounting identity outcome of govt. running a surplus and implications for UK

Its not politics, just basic maths (btw, precisely what OBR say will happen - i.e. household debt to income ratio to rise above prior peak as Osborne cuts spending in next parliament)

Most of you are wrong. Sorry.

h/t Bond Vigilantes for link

http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/

This is flawed reasoning because it only considers the present and not the effect of the surplus vs deficit rolled into the future. By running a deficit we are not reducing overall calls on savings or requirement for debt, we are just trading a reduction in the present for an increase in the future (with the opposite being true for surplus). However the increase in the future calls on savings and requirements to take on debt will be larger than the reduction today because of the accrued interest on the extra debt caused by the deficit.

A perpetual deficit will always eventually lead to a situation where 100% of tax receipts are used to service gov debt i.e. default.

Edited by goldbug9999

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So debt no longer matters?

His analysis fails to address the issue of debt service drag on the economy, each year this cost increases at some point you won't be able to off-set these increases by reduced current spending, then what?

The real problem is governments are spending money they haven't taken in taxes, what they should be doing is spending last years taxes, this year as they'd know what they have and what expenditure can take place. When the tax projections are wrong the government is already committed to spending and the only way to fund it is via deficit spending. Not a problem in the short term but you can't do this in perpetuity, at some point the logic fails.

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Not actually true. Look at some of the countries with famously big surpluses - e.g. Norway just across the sea from us.

The idea that government debt is peoples savings was only half true even when there was a Gold Standard. Nowadays it's QE, which means the currency is only held up by prostituting our assets (like Prime London housing) as a safe haven to the global super-rich. Before QE government debt was a more benign form of selling off our assets to the rest of the world.

Paying lip-service to Keynes has become today's fashion. Now Cameron is just talking of the other half of Keynes's prescription: running a surplus in good times. Shame he isn't doing it in practice, nor ever will in the foreseeable future.

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Basically what everyone else said.

If the government defecit comes from investment in key infrastructure like ports that will eventually improve trade, that's fine.

Just more short term thinking there, as per usual.

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So his point just seems to be that a government surplus comes from tax? A deduction worthy of Holmes there. Higher taxes than are needed to pay for things are obviously a drag but to jump from that to an assumption that a country living within its means is therefore bad is rather ridiculous. Running a deficit means more taxes (or total disaster) in the long run. The worst that can be said of a surplus, unless it's huge, is that you might be slightly over-taxing.

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Personally I think the focus should be on the external account rather than a fight between private and public.

If we turned into an exporting economic powerhouse like a Germany or Switzerland, you can have a surplus in both with ease (or at least an 'effective surplus' by keeping the public sector growing above inflation but below gdp growth).

Lots more HPI needed, so our export of houses brings in big profits.

Our big world-leading non-financial export (armaments) may be experiencing escalating cost and diminishing returns for each new war, since the glory days when bombing someone would reliably serve as a low-cost trade fair for huge exports.

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By 2020, the UK government will have been in surplus for 6 of the previous 40 years.

The idea that the UK is in danger of doing itself severe harm by running significant government surpluses over an extended period of time is preposterous given how unlikely such an outcome is.

BTW, there is nothing "mathematically certain" about this argument because the National Income Identity referred to also includes other factors (i.e. investment and trade).

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By 2020, the UK government will have been in surplus for 6 of the previous 40 years.

The idea that the UK is in danger of doing itself severe harm by running significant government surpluses over an extended period of time is preposterous given how unlikely such an outcome is.

BTW, there is nothing "mathematically certain" about this argument because the National Income Identity referred to also includes other factors (i.e. investment and trade).

Noted in article.

So, if UK in next parliament runs mega trade surpluses then youre correct. Else youre not.

how likely do you rate that? (btw it aint OBR forecast is it)

Ofc youre also effectively saying well have a sterling crisis in next parliament &/or another (continued) housing boom.

Edited by R K

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This is flawed reasoning because it only considers the present and not the effect of the surplus vs deficit rolled into the future. By running a deficit we are not reducing overall calls on savings or requirement for debt, we are just trading a reduction in the present for an increase in the future (with the opposite being true for surplus). However the increase in the future calls on savings and requirements to take on debt will be larger than the reduction today because of the accrued interest on the extra debt caused by the deficit.

A perpetual deficit will always eventually lead to a situation where 100% of tax receipts are used to service gov debt i.e. default.

Ricardian equivalence is nonsense. Sorry.

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Not actually true. Look at some of the countries with famously big surpluses - e.g. Norway just across the sea from us.

The idea that government debt is peoples savings was only half true even when there was a Gold Standard. Nowadays it's QE, which means the currency is only held up by prostituting our assets (like Prime London housing) as a safe haven to the global super-rich. Before QE government debt was a more benign form of selling off our assets to the rest of the world.

Paying lip-service to Keynes has become today's fashion. Now Cameron is just talking of the other half of Keynes's prescription: running a surplus in good times. Shame he isn't doing it in practice, nor ever will in the foreseeable future.

Well, I guess Keen is right and wrong. He's right someone has to be in debt. But that could be people abroad, via exports, rather than Brits.

Given Cameron has smashed Browns trade deficit record, I guess thats irrelevant anyway...

Mosler wrote similar stuff a while back - While I think many of his points are immaterial (he thinks printing will solve everything), and will in no way fix the problems with our economic systems, they are mostly technically correct.

http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Its quite scary, the level of ignorance even in the so called experts...

I opened with a question: “Larry, what’s wrong with the
budget deficit?” He replied: “It takes away savings that could
be used for investment.” I then objected: “No it doesn’t, all
Treasury securities do is offset operating factors at the Fed. It
has nothing to do with savings and investment.” To which he
retorted: “Well, I really don’t understand reserve accounting,
so I can’t discuss it at that level.”
Senator Daschle was looking on at all this in disbelief. This
Harvard professor of economics, Assistant Treasury Secretary
Lawrence Summers didn’t understand reserve accounting?
Sad but true.
Al Gore
Early in 2000, in a private home in Boca Raton, FL, I
was seated next to then-Presidential Candidate Al Gore at a
fundraiser/dinner to discuss the economy. The first thing he
asked was how I thought the next president should spend the
coming $5.6 trillion surplus that was forecasted for the next 10
years. I explained that there wasn’t going to be a $5.6 trillion
surplus, because that would mean a $5.6 trillion drop in nongovernment
savings of financial assets, which was a ridiculous
proposition.

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Anyway...discussing the private vs public savings/debt equivalence is pretty much closed system nonsense...the private - private debt/savings issues are far more important...something Krugman et al conveniently bypass.

Government debt is under 20% of systemic debt...its unlikely it will be able to offset the whole private debt issue without something blowing up in their faces...which is essentially the problem...a unit of privately fabricated credit spends exactly the same as one unit of central bank created money.

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So debt no longer matters?

His analysis fails to address the issue of debt service drag on the economy, each year this cost increases at some point you won't be able to off-set these increases by reduced current spending, then what?

The real problem is governments are spending money they haven't taken in taxes, what they should be doing is spending last years taxes, this year as they'd know what they have and what expenditure can take place. When the tax projections are wrong the government is already committed to spending and the only way to fund it is via deficit spending. Not a problem in the short term but you can't do this in perpetuity, at some point the logic fails.

I dont think debt has ever mattered for Keen. His response to 'wont a debt jubilee mean moral hazard' was 'the moral hazard has already taken place'

As if people only have the capacity to excercise bad judgement once in their life and offering them a bailout will mean they will be prudent from there on in

I dont know what planet Keen lives on, but its probably one where Marx is the altruistic premier, everyone cleans up after themselves and fairys save us from falling objects.

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Steve Keen on the accounting identity outcome of govt. running a surplus and implications for UK

Its not politics, just basic maths (btw, precisely what OBR say will happen - i.e. household debt to income ratio to rise above prior peak as Osborne cuts spending in next parliament)

Most of you are wrong. Sorry.

h/t Bond Vigilantes for link

http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/

Why should this be a surprise to anyone?

In people from the future aren't going to pay for it, then people from the present are.

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I dont think debt has ever mattered for Keen. His response to 'wont a debt jubilee mean moral hazard' was 'the moral hazard has already taken place'

As if people only have the capacity to excercise bad judgement once in their life and offering them a bailout will mean they will be prudent from there on in

I dont know what planet Keen lives on, but its probably one where Marx is the altruistic premier, everyone cleans up after themselves and fairys save us from falling objects.

We already have the evidence of that in spades. The crooks in the banking syste, that failed and were bailed out have carried on exatcly as before and stolen even more.

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This is flawed reasoning because it only considers the present and not the effect of the surplus vs deficit rolled into the future. By running a deficit we are not reducing overall calls on savings or requirement for debt, we are just trading a reduction in the present for an increase in the future (with the opposite being true for surplus). However the increase in the future calls on savings and requirements to take on debt will be larger than the reduction today because of the accrued interest on the extra debt caused by the deficit.

A perpetual deficit will always eventually lead to a situation where 100% of tax receipts are used to service gov debt i.e. default.

Yup. It is a way to spend the earnings of tomorrow, today. As people get more free stuff today they vote for it and as the people of tomorrow haven't had chance to vote yet, they get shafted.

In short, the children of tomorrow will pay for what is being spent on adults of today.

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Basically what everyone else said.

If the government defecit comes from investment in key infrastructure like ports that will eventually improve trade, that's fine.

Just more short term thinking there, as per usual.

Long term projects for tomorrow doesn't win votes today.

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I dont think debt has ever mattered for Keen. His response to 'wont a debt jubilee mean moral hazard' was 'the moral hazard has already taken place'

As if people only have the capacity to excercise bad judgement once in their life and offering them a bailout will mean they will be prudent from there on in

I dont know what planet Keen lives on, but its probably one where Marx is the altruistic premier, everyone cleans up after themselves and fairys save us from falling objects.

On the contrary, the post-Keynesian Minsky-Fisher-Goodwin model of debt deflation which Steve developed can't be understood at all without first identifying the role played by private debt on consumption. It's the Keynesians, neoclassicals and monetarists who ignore debt, banks and money. As for a debt jubilee? Devising one that simultaneously compensates creditors for their losses is probably an insurmountable hurdle. Current price inflation, on the other hand, the central banker's preferred tool of debt forgiveness, disproportionately impacts the poor. A debt jubilee might be fairer and more equitable to all.

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This is all going to be completely moot anyway.

When UK house prices crash (again) the TBTF banks will fail (again) and the Treasury will ride to the rescue (again). Government deficits after the next crash will make today's look like loose change.

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If we turned into an exporting economic powerhouse like a Germany or Switzerland, you can have a surplus in both with ease...

Except German government borrowing has been pretty much the same as everyone else (greece aside). I know that they exceptionally have a balanced budget for this and presumably next year, but I think that may be due to the current low interest rates.

In fact, I have been meaning to raise this myself. If even Germany has been increasing government borrowing by about 1% of gdp per year since the war, then presumably at some point (maybe in 50 ~ 100 years or more) the debt is going to be unsustainable. For everyone.

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the flaw is, the assumption that banks dont monetise assets apart from Government Bonds.

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Ok, my turn again.

An ever increasing debt to gdp ratio is unsustainable.

There is probably a "right" level, which on historic comparisons, is probably somewhere under 100%. It may vary over time and with economic conditions. So there be times when it increases, but ther should also be times when it is perfectly reasonable to reduce this ratio.

I think there probably is a relationship between a good functioning national economy, and stable government debt. There is certainly a relationship between very high government borrowing and imminent economic collapse.

Summary of reasons why governmentment surplus does not automatically mean increase in private debt /reduced savings.

increase in money supply

negative inflation

net exports

inward investment

(reduced) government overseas borrowing

Edited by Steppenpig

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