Why Governments Can’t Choose to Run Balanced Budgets.

It is very difficult for many people to get their heads around the idea that the Government don’t have to run balanced budgets. It is even harder for those same people to accept that it’s usually not even possible anyway. It’s so counter intuitive, with regard to their own experience, that they’ll often just flatly refuse to accept a reasoned explanation. “If the Government only spent what it first took in taxes then the budget would be balanced.” would be a typical comment. End of discussion.

Many also don’t like the idea that the money supply needs to increase with time . In their minds, once a country has been issued  with its ration of money then that’s it. It should manage on that for ever. The question of who issued the money in the first place is one which is much too difficult to think about.

The UK and US money supplies have increased almost linearly with time for the last several decades regardless of the party of government of the day. So it’s a clearly observable fact that is what happens in real economies. The private banks play the major part in increasing the money supply, but Government needs to play its part too. But it should be noted that it is only a part. Most money in the economy is the creation of the private banking sector.

A government deficit is  necessary to allow individuals and companies to save. For every borrower there has to be a lender and vice versa. Savers are lenders. That means that someone has to borrow it from them. If the non-government sector are net saving then the government sector has to be a net borrower. ie it recycles the savings via the sale of bonds which it then spends back into the economy.

The non-government sector also represents overseas sellers of goods and services. Both Britain and the US generally are happy to run their trade at a deficit to the rest of the world. That deficit is effectively the rest of the world saving £ sterling or US$ treasury securities. Money  drains out of the US and UK economies as those net imports are paid for. The money has to be replenished by the UK and US Governments selling securities into the market and spending that money back into their economies. In other words: by running  budget deficits.

So no Government can, in a free society, just choose to run a balanced budget. A balanced budget is only possible if the private sector, in aggregate, chooses  not to net save, and also chooses  not to purchase more from abroad in imports than it sells abroad as exports. Or, if like Germany, the savings of the private sector are offset by a large export surplus , currently about 7% of GDP, then it is possible, as they do, to run a balanced budget. For Germany the numbers add up and they can do this without any real problem. If the UK or USA tried to do the same thing without addressing the trade question they would very quickly crash their economies – exactly as has happened in Greece and Spain.

See also: https://petermartin2001.wordpress.com/2014/03/11/an-economic-quiz/

2 responses to “Why Governments Can’t Choose to Run Balanced Budgets.

  1. I had an example of inflation today when I went to buy an extra G-clamp. The old one I took with me (made locally) still had the price, $4.50 written on it in permanent ink. I remember buying it in 1971. I took it into Bunnings and asked if they could beat the price by 15%! LOL! The cheapest 8-inch G-clamp they had was made in China, at $45, and a Record, made in the UK, was $65. So much for the reserve bank doing a great job of maintaining the purchasing power of the dollar! Let’s see, 43 years to go from $4.50 to $65 — that’s an annual inflation rate of 6.4%, and you can bet your bottom dollar that houses have gone up at a higher rate than that! 1971 was the year I was married, and I well remember soon after seeing a beachside mansion that must have been worth the then princely sum of $100,000, and then about five years ago finding that it had just changed hands for $3.4 million! That’s an annual increase of 9.7%, made possible by the fact that the creation of new money ex nihilo when bank grant mortgage loans makes it possible for people to bid up the price of houses at a rate far in excess of the increase in their wages and salaries, and far in excess of what the government measures as the Consumer Price Index. And the OCR is an ineffective tool for controlling the rate of increase of the money supply by commercial banks, the creators of 98% of the nation’s money supply. One word describes the banking and monetary system — loony!
    Yes, loony! We are loony to keep tolerating the fact that we the sheeple are being ripped off so badly!

  2. Pingback: The Bedroom Tax, Big Benefits Row and the degradation of the teaching proffession | alittleecon

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