What public sector surpluses really do is increase private debt and promote trade imbalances.

Lask week I noticed the “Debt Resistors Operations Manual” was released. I fliped through the version posted online and was quite impressed. In terms of a guide book on how to deal with personal debt, it seems very well researched and thought out. I certainly look forward to the chance to examine it greater depth.

One thing to keep in mind when thinking about resisting debt is that, while personal debt and the policies that cause it do need to be resited, debt at the macroeconomic level is not something that needs to be eliminated. Economies where money is used require debt, without which there could be so savings, and likely no growth as well, and the economy could also never import more than it exports.

Let’s imagine an economy with $10 in it and 10 people. Each person starts with $1, each personal also produces goods and services each month worth $1. We have a market that clears, every person spends $1 per month on the stuff that the others make.

Now, in our happy economy, one person is feeling concerned about their future, and decides to not spend the entire $1 they earn that month, but instead, they start saving 10c per month. Now our economy can’t clear. Since without that 10c, the total income is now 9.90 and therefore all 10 people can no longer earn $1 each. Because somebody is saving 10c, this means that there is 10c less to earn.

Last week’s text, and the talk I gave at the Beautiful Trouble book launch last week, was about the Sectoral Balances. Understanding the sectoral balances is tremendously helpfull in understanding current economic issues related to debt, but is also required to understand the work I am doing on intermodal value flows, so I’m tyring to get a basic understanding of this across. I’ll try again this week, starting with the example above. The example describes our starting point, our private sector balance.

So what happens now that there is not enough income for everyone to earn $1?

Well, the obvious thing is that they all reduce their spending by 1c each, and the sector remains in balance, though the economy has shrunk. Our saver’s income will also fall to 99c, like the others, if this person continues to save 10c, then total income becomes 9 people spending 99c and 1 person spending 89c, making 9,89c. Once again, this reduction in total income, will mean that each person has to reduce their spending again, so the economy will continue to shrink every month that the 10c is saved. Wich also means that productive capacity becomes underutilized, since peaple could produce more, but nobody can consume any more.

Now, perhaps this shrinking causes other peaple to become concerned about the future too, say they all start saving 10c each, resulting in even faster economic decline.

Eventually, perhaps even quickly, the level of income will not be enough to sustain spending for the necessesities of life, like housing, food, health, education, child care, etc, and so not being able to reduce spending further, people will start going into debt, perhaps even fall into poverty, not because they can not produce enough to provide for themselves, but because the desire to save is reducing the ability to consume, and reduced consumption means reduced income, reduced income eventually means debt or proverty.If nothing else happens, debt will keep rising until the debtors are no longer able to pay, they will default, and this means that the savings that financed the debt will vanish.

The private sector is just one of the three sectors used in the “Sectoral Balances Approach.” The other two being the Public Sector and the External Sector.

So, one option that our Private Sector has to avoid shrinking, and eventually colapsing, is increasing it’s exports. If it can export the same amount as it saves, then it can maintain it’s income and savings without debt. So, say each of our 10 people earns $1 and saves 10c, this means that to be in balance the Private Sector has a $1 surplus relative to the External sector, it needs to export $1 worth of good and services per month.

Exporting $1 worth of goods per month allows them to save $1, or 10c each, per month.

However, whenever you have an export surplus anywhere, you necessarily have an export deficit in some other place. So while our 10 people have balanced their economy, they have just pushed their imbalance abroad, and thus some other economy, somewhere, is being pushed toward debt and collapse instead. Once that economy colapses, they will no longer be able to import, and thus this strategy is not sustainable.

Looking at just the private sector, the only sustainable thing to do is to stop saving money.

It’s import to understand that this is true with any form of money, it doesn’t matter if we’re talking gold coins, bitcoins, or sea shells, so long as the amount is generaly fixed, and that getting some means giving up something of value in exchange. The private sector and external sectors can only be in balance if there are no savings, the existinance of savings can only mean rising debt or shrinking economy and underutilized productive capacity. Such is life in a money economy.

However, we have a third sector. The Public Sector. Yet, one of these things is not like others. Unlike the Private and External sectors, the Public Sector does not need to give up anything to get money. It creates money. There is no fixed limit on how much money it can create, it can never run out, it just creates money “by fiat,” by declaring it to exist. There is another side, it can also remove money from the economy, by taxing. All government money enters the private sector as government spending and exists the private sector as tax payments.

The diferences between what the government spends and what the government taxes is the Public Sector balance. If the public spends more that it taxes, then the sector is said to be in defecit, if it taxes more than it spends, it is said to be in surplus, if it taxes exactly what it spends, the public budget is said to be “balanced.”

So long as the other two sectors are balanced, if the government spends more that it taxes, this means that prices will rise. Government spending will add demand to already clearing markets, and thus push prices up. However, this is almost never the case. Typically economies want to save, thus the combined balance of the private sector and the external sector is not in balance, but in deficit. Inflation alarmists always look only at the public sector budget, and worship public surpluses, yet understanding sectoral balances helps you understand that it is extremely unusual for any indivudual sector to be in balance, all three sections balance each other. And that thefore the public sector can only be balanced if there are no savings, or if any savings that do exist are the result of trade imbalances.

A public surplus necessarily reduces private wealth. This is quite the opposite of the often promoted idea that public sector surpluses are needed to increase public wealth. What public sector surpluses really do is increase private debt and promote trade imballances.

This certainly leaves a lot of questions open, like the composition of debt within the private sector, between the household and business sector for example, or between the banking and non-banking sectors. These question sheds some light on exactly why some rich private sector interests are interested in promoting austerity and reducing public spending. Also, technical questions about “fractional reserve banking,” that boogey man of so many currency cranks, not to mention the potential of alternative currency, barter, mutual credit, etc, to play a role, but I’ll leaveit here for now. Understanding the sectoral balances is really key to to taking the conversation further, so roll it around in your brain, and feel free to comment, ask questions, etc.

I’ll be at Stammtisch tonight around 9pm. See you there!

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