Monday, May 11, 2009

White House: Budget deficit to top $1.8 trillion



In the past year $11 trillion of household wealth has been wiped out. Therefore, it is a good thing that the deficit will reach $1.8 trillion this year. Another way to think about it is that the government is providing $1.8 trillion in financial assets to the household sector. Still a long way from recouping the entire, $11 trillion, but nothing to sneeze at, to be sure.

Definition: Deficits add to private sector net savings in the form of financial assets (Treasuries).



Private savings accounting identity:

Pvt = (GDP + NFI - T + TR + INT) - C

GDP = Gross domestic product
NFI = Net foreign income
T = Taxes paid to the government
TR = Transfer payments from the government
INT = Interest paid on the government debt

As you can see, three of the imputs that determine private savings are all related to the government: T, TR and INT.

The deficit effectively increases both TR and INT. Deficits mean higher transfer payments are occurring (or at least above the amount of revenues taken in) and intrest paid by the government increases as well. The latter occurs even if interest rates are low, due to the fact that the amount of Treasuries held by the public increases. For example, 10% of 1 million is the same as 0.1% of 1 billion.

Unfortunately the president doesn't understand that the level of private savings could be increased further if taxes were cut. He is actually pushing to increase taxes because he is operating under the false notion that taxes are need to "fund the deficit." This is erroneous and it displays a fundamental lack of understanding of our monetary system.

4 comments:

googleheim said...

this would help the banks too.

as we all know they just threw the pot out with the soup -

they are cutting credit lines for the effect of a short-term exposure decrease - on lines of a mini-beer buzz.

but longer term will be the fact that now consumers' credit scores will be screwed with respect to the debt-to-creditLine measurement since D/CL will get bigger when CreditLine CL gets smaller.

that means more people will spend less !! make less and do less.

this is another spiral

and if he increases taxes that will be worse.

ellimination of taxes for those who spend the most ( incomes less than $200K ) as well as small businesses will make the patch to the hole.

The Joker said...
This comment has been removed by the author.
The Joker said...

Unfortunately, the president and Congress think of government spending in the same manner as our personal finances.

Political agendas and not understanding the way deficits increase private savings is hurting our economy.

I'm not an economist or a high ranking government official, yet I understand how deficits help, not hurt, the American people.

I guess electing officials that truly understand this concept will not happen in my lifetime.

So sad.

Mike Norman said...

Joker:

Yes, how sad. And what person would deny themselves the finest quality of life if he or she could do it merely by crediting the bank accounts of the vendors and producers that provided the things they needed? To deny oneself in the midst of abundance is to live an ascetic--and purposely miserable--life. Some religions teach this, with the caveat that true rewards come in the afterlife. Maybe this is what we believe in as a nation?