February 13, 2019

Understanding public deficits, money, and profit

Comment on Lars Syll on ‘Understanding government debts and deficits’

Blog-Reference and Blog-Reference

Lars Syll correctly observes: “The balanced budget paradox is probably one of the most devastating phenomena haunting our modern economies.”

He forgets to add, though, that this phenomenon ultimately derives from the stupidity/ corruption of economists, more specifically from the lack of the true Profit Theory. Because the Profit Theory is false, the whole analytical superstructure is false including, of course, Money Theory, Distribution Theory, and Employment Theory. This prevented to this day the understanding of the effects of public deficit-spending/money-creation.

The process goes schematically as follows:#1, #2

(i) The initial economic configuration is the elementary production-consumption economy.#3 The initial state is characterized by budget-balancing of the household sector C=Yw and zero profit of the business sector Q≡C−Yw → 0. At this stage, money is a pure transaction medium as shown on Wikimedia AXEC98

Money is created out of nothing. The stock of money is zero at the beginning and end of the period.

(ii) The government deficit-spends. Deficit D is defined as public spending G minus taxes T, i.e. D≡G−T. T is set to 0. Deficit spending on current production causes a one-off price hike and the business sector ends up with macroeconomic profit Q=G.

(iii) The business sector fully distributes profit. The distributed profit Yd goes to the Oligarchy and takes initially the form of deposits at the central bank. The CB’s balance sheet shows government overdrafts on the asset side and the Oligarchy’s deposits on the liability side. Both sides are equal to the penny. The CB's deposits are money. Money is the liability side of a special credit relationship.

(iv) The government consolidates overdrafts by selling interest-bearing bonds. The bonds are bought by the Oligarchy and paid for with deposits. The CB’s balance sheet shrinks again. The Oligarchy’s portfolio consists of bonds and money = deposits at the CB. The value of the portfolio is roughly equal to the public debt.

(v) The government taxes the household sector and transfers the tax in the form of interest payments to a subset of the household sector, i.e. to the Oligarchy.

(vi) This process is repeated for an indefinite time. Public debt grows and is continually rolled over. Interest payments grow faster or slower depending on whether the current interest rate is higher or lower.

(vii) How long this process can last is unknown. In some future period, though, the public debt is redeemed. The government taxes the household sector, total expenditures reduce to C−T, the market-clearing price falls, and the business sector makes a macroeconomic loss. Whether this leads to a breakdown of the economy is open to speculation.

Obviously, public deficit-spending/money-creation is the biggest redistributive action the world has ever seen.#4 As a rule of thumb, the financial wealth of the Oligarchy grows in lockstep with the public debt. In other words, the fabulous wealth in the U.S. is the mirror image of humungous public debt ($22 trillion and counting).

Egmont Kakarot-Handtke

#1 From MMT misunderstandings to the true Theory of Money
#2 Deficit-spending, public debt, and macroeconomic profit/loss
#3 The miracle cure of economists’ micro-macro schizo
#4 Keynes, Lerner, MMT, Trump and exploding profit


Wikimedia AXEC102