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August 21, 2012


Diarmid Weir

Perhaps a change of terminology is needed to get the message through to our bone-headed leaders.

'Saving' sounds so virtuous, yet when allowed by a monetary economy to become divorced from output-enhancing investment, it is disastrous.

How about 'idling'?

George Hallam

What about 'docking' or 'left fallow'?




Actually according to Markit household debt is actually increasing. Households overall are not deleveraging. However confidence is low, and spending will continue to be muted.


Otherwise I agree with both your info and your conclusions (for what that information is worth).

Have you seen Edward Harrison's explanation of the private/public accounting balance? My take on his take is here: http://moderndebtjubilee.blogspot.co.uk/2012/08/savings-debt-and-deficit.html


Rather timely article here (although I doubt you'd agree): http://blogs.lse.ac.uk/europpblog/2012/08/21/hayek-eurozone-crisis/

Frankly there's no easy way out. Yes we might be able to kick start things through stimulus spending but such spending would only create greater problems further down the line.

So we just have to wait...

George Carty

Aren't Asian and German mercantilism the root cause of the West's debt troubles?



If private sector deleveraging is the root cause of the recession and deficit why not try Steve Keen's Debt Jubilee remedy? Could it be any worse than what we have now?

Woj (@BubblesandBusts)

Its great to see more posts regarding sectoral balances. However, I think it's important to clarify that in order for the non-govt sectors to save, the govt only needs to run a deficit...not necessarily spend more.

If the private sectors start to re-lever at this point, it will help spur growth in the short-term, but will once again bring about its own crisis as savings and income of the productive sector are transferred to the non-productive sector (i.e. financial.)


This accounting identity always sounds far too neat an explanation.

You seem to be saying that if the private sector wants to save then the government will have a large deficit regardless of whether it chooses to slash public spending by 50% or borrow £300bn and build houses and hospitals and schools galore.

Does make you wonder why we have a Chancellor or an annual Budget.


Shinsei, I'll have a go at answering that one. If, in current circs, the govt cut spending by 50%, that might have a pretty dramatic effect on tax receipts. And you'd probably have to hire a lot of riot police, offsetting the savings.

Of course, there could be circs where a country is stuffed whether the govt cuts, spends, whatever....



Thanks. I had been trying to play out in my mind the consequences of the knock-on effects of extreme government measures on the private sector. And as you say extreme government austerity would cut tax receipts.

But if the government decided to stop immediately the £15bn paid to the EU and the £3bn paid overseas through DfID and brought back all troops in Afghanistan (£2-3bn) that would have a dramatic impact on the deficit but would it really influence whether FTSE100 companies spend their £750bn cash pile or effect whether the man in the street takes out a mortgage ?

Of course there is an accounting identity but whether it is driven by the private sector and a public sector deficit/surplus results is open to question. Surely government spending or retrenching policies also have an impact on what the private sector does.


I wonder now much of this hoarding is baby boomers looking at the wrong end of their working careers in a recession and realising that their golden lives are coming to an end. All those dire warnings of demographic time bombs and horror stories of poor care for the elderly aren't conducive to running down your savings.

Just thinking aloud.....

Account Deleted

@Shinsei1967, if the government decided to withold £15bn from the EU with immediate effect, so breaching its terms of membership and precipitating a crisis, you can be fairly certain that the FTSE100 would not see this as a signal to invest its cash pile domestically, but rather as a trigger for even greater hoarding/saving, probably in the form of capital flight abroad.

As Chris explains in the IC piece he links to, private sector spending does not always produce increased public borrowing. The alternative outcome would be a worsening trade deficit - i.e. excess savings are exported if domestic borrowers cannot be found.

Account Deleted

Dang. That should be "private sector saving", not "spending".

gastro george

Isn't the point that the deficit is an accounting *outcome*, and therefore can't and shouldn't be targeted.


Further to A to E's post, do the savings Shinsei identifies add up to that much against a deficit of about £120bn? And I think the EU figure of £15bn is for gross payments to the EU, not net payments. The proposals may or may not be "a good thing" for other reaaons, but it's not clear to me they knock that much off the deficit.

I happen to share the gut reaction that the accounting identity point is too neat, but I suspect my reaction may be wrong...


It can hardly be counted as "austerity" if they're still borrowing money to make ends meet.

Ralph Musgrave

Gastro George above said, “Isn't the point that the deficit is an accounting *outcome*, and therefore can't and shouldn't be targeted.” Spot on. Or as Keynes put it, “Look after unemployment, and the budget looks after itself.”


What worries me is that Georgie might have a splurge on rails/roads/houses etc - but we then find ourselves with shiny railways/roads/houses and a whacking great debt and no work to pay for it.

The big question is where is profitable work going to come from?

gastro george

"It can hardly be counted as "austerity" if they're still borrowing money to make ends meet."

The "there can't have been any cuts because there is still a deficit" mantra is one of the most asinine around - yet is still parroted by the likes of John Redwood. It confuses total government expenditure with expenditure on services. As is transparent, you can cut services, but that just reduces tax income and increases welfare payouts. Which is why austerity is self-defeating.

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William Richardson

rogerh or on completely unproductive casino gambling via the continuing FIREnancialisation of the economy?

Bigger deficits mean higher aggregate demand, higher sales and higher profits for companies who employ more workers when demand/sales go up.


so why don't we just borrow without limit and without end?


The Accounting identity is correct by definition however people feel about it. The problem is as Delong explained on his blog idetities do not explain causation. The key idea is what is the causation of surplus or deficit. And how does any alteration affect the other sectors of the economy.

The assumption that if you could cut the Government deficit it would boost the private sector is wrong, there is no reason to think it would on its own. If say a huge export boom or massive expansion of the money stock and money spending in the non Government sector took place private demand would rise, net saving fall and the Government deficit would disappear. But it would have no connection with any ideas about austerity one way or another. And the answer to Dipper is that nominal debt nerver does end. It is managed that is all. In 1815 State debt was 250 per cent of GDP. Plenty of way to go yet. Hysteria about debt is one of those things which appear at times of trouble but has little to do with anything. At least it can buy useful public goods unlike the debts that asset strippers, like Mitt Romney, borrow to enrich themselves. All we get for that is bust firms and unemployed workers.


"the answer to Dipper is that nominal debt nerver does end"

one way a physicist evaluates a theory is to look what happens at zero and what happens at infinity. An infinite deficit and an infinite debt would clearly not be feasible. So at what point does borrowing and debt stop being a useful tool to support or build an economy and become a damaging burden?

The only answer I've seen is an observation that over 100% of GDP debt becomes an oppressive burden. But I've not seen any explanation. Can anyone comment?



Why is it that those against austerity can never come up with a formula or rationale for what would be a limit on borrowing?

If a small amount of borrowing would do a small amount of good then surely a humongous amount of borrowing would do a humongous amount of good. Spend spend spend! Let's all give up work, borrow lots of money, and buy whatever we want. Instant happiness and economic recovery too!

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