Roughly speaking, science is about relations. Economics, too, abounds with relationships: supply function, demand function, consumption function, the Phillips Curve, IS-LM, the global debt clock,#1 and so on.
Some of these relationships implicate trouble for the future: “As interest rates rise, there are bound to be spillovers from one sector to another with the linchpin being households. As interest rates rise, it is individual households that ultimately pay the debt service costs to government via taxes, pay to service their mortgages and buy the goods and services from corporations that keep the economy humming and allow the corporations to service their debt. It is a lot more inter-connected than you think which is why central bankers should be on edge.” (Nick Rowe)
True, indeed, but a bit trivial. A higher interest rate means more money for the borrowers. This is known for five millennia.#2 To be sure, deficit spending and debt have an impact on the distribution of income and financial wealth.
However, economists talk much about the relationship between deficit spending and inflation or employment but not so much about deficit spending and distribution. The reason is simple: economists know next to nothing about it. The ultimate reason, though, is that economists do not know what profit is.#3 This, of course, includes Nick Rowe.
The fact is that economists are incompetent scientists and they thoroughly messed up macroeconomics.
To make the argument short, the axiomatically correct Profit Law for the economy as a whole is given as Qm≡Yd+(I−Sm)+(G−T)+(X−M) which reduces to Qm=(G−T) for Yd, I, Sm, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit (G−T) of the public sector, in a nutshell: Public Deficit = Private Profit.
As public debt grows, so does the financial wealth of the one-percenters. The same holds for private debt. And this is what can be observed over the last decades. Everybody has heard the two slogans: the rich get richer, and, the worldwide debt grows exponentially. The exact relationship between the two phenomena is given with the Profit Law.
The Profit Law is the essential relationship for the monetary economy. The curious thing is that economists do not know it.#4 For 200+ years now, the Profit Theory is false and by consequence Distribution Theory. Nick Rowe’s discussion of the potential hazards of public debt shows that he is wandering around in the dark in blissful ignorance of the real threat.
* "That was my post so if the post is ‘trivial’, I am entirely to blame." Livio Di Matteo
#1 Economist The global debt clock
#2 Business Insider, The 5,000-year history of interest rates shows just how historically low US rates still are right now
#3 For details of the big picture see cross-references Profit
#4 “A satisfactory theory of profits is still elusive.” (Desai, Palgrave Dictionary)
Related 'The demise of phony experts: macroeconomics is provably false' and 'Fact of life: your econ prof is scientifically incompetent' and 'Does economics matter more for bread or for circuses?' and 'Macro imbeciles' and 'The curious non-existence of profit in economics' and 'Profit: The most powerful formula of economics'.
Frank Restly: “This is a static equation in that there is no time lag indicated between a government/person going into debt and increases in macroeconomic profits being realized, which is quite unrealistic.”
The time dimension has been left out here in order to focus on the crucial distributional relationship which is given with Public Deficit (in period t) = Private Profit (in period t). Time has been extensively dealt with elsewhere.#1, #2
You maintain: “… if you want to define "macroeconomic profit" this way, that’s your prerogative.”
The foundational concepts of economics have to be consistently defined. This is done by axiomatization. There are no definitional prerogatives in science, this delusion is called Humpty Dumpty Fallacy and it is endemic among brain-dead economists.#3
The Humpty Dumpty Fallacy is one of the main reasons why economics is, after 200+ years, still at the proto-scientific level.
Livio Di Matteo says: “I do not see how deficits are equivalent to profits.” It could be perhaps a good idea to study serious economics#4 and no longer hang out with the econ-clowns of WCI.
Livio Di Matteo says finally: “The view of deficits as profit also does not explain to me why the business community is usually at the forefront of calls for deficit reduction and balanced budgets.” This phenomenon has been addressed several times elsewhere.#5, #6
#1 Essentials of Constructive Heterodoxy: The Market
#2 The Synthesis of Economic Law, Evolution, and History
#3 Profit, income, and the Humpty Dumpty Fallacy
#4 Profit theory in less than 5 minutes
#5 Austerity and the idiocy of political economists
#6 Austerity: Who takes the little man for a ride?
Your example points in the right direction. However, it suffers from the Fallacy of Insufficient Abstraction.
In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw), and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).#1
It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving, and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
Starting from the elementary production-consumption economy, complexity is then successively increased. To make matters short, the axiomatically correct relationships are given here without further explanation. It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Yd distributed profit:
(i) Qm≡−Sm in the elementary production-consumption economy,
(ii) Qm≡I−Sm in the elementary investment economy,
(iii) Qm≡(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
(iv) Qm≡Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.
From (i)/(ii) follows that saving and investment are NEVER equal and that ALL I=S/IS-LM models are false since Keynes/Hicks. In other words, macroeconomics is dead for 80+ years and After-Keynesians have not realized it.
From (iii) follows that ― given business sector investment I and household sector monetary saving Sm ― Public Deficit = Private Profit. The government deficit (co-)determines the cumulative stock of financial assets in the business sector. The sum of public deficits over time accumulates to ever-growing public debt.
Eq. (iv) defines the relationship between deficits, macroeconomic profit, and growing debt. Economists do not understand it from Adam Smith/Karl Marx onward. Economics is the worst embarrassment in the history of modern science and the so-called Worthwhile Canadian Initiative is an integral part of it.#2
#1 Macro for retarded economists
#2 Is Nick Rowe stupid or corrupt or both?