Mirror mirror on the sectoral balances.
It’s been a bad few weeks for me so far after my car broke down and strange things have been happening to me ever since,financially speaking. When my car wouldn’t start I immediately lifted the bonnet and discovered it was in fact the boot. So I tried the other end and nodded sagely, I had found the engine, I know an engine when I see one. It was at this point I made the further discovery that I hadn’t a clue what to do next so I called a garage. The mechanic immediately did that sharp intake of breath through pursed lips and braced myself for the worst. Something unintelligible was wrong, something unintelligible needed replacing and it needed hooking up to something unintelligible. His powers of speaking intelligibly made a sudden recovery as he explained my wallet would be £750 lighter. I Knew what I had to do, I would Do The Right Thing.
I gathered my wife and 2.4 children round the table, if you’re wondering where I got this perfect nuclear family from, I cut it out from a packet of 1950’s breakfast cereal, and explained the predicament. We are, I explained dramatically, in debt and the right thing to do is pay off this debt, we are all in this together. I announced a new austerity scheme by which I gave up a pub night, Friday night pizza cancelled and no shoes for Mrs40. This necessary belt-tightening had to be done because there is no magic money tree and if the overdraft was not paid off we would be ruined by the looming interest rates, we must learn to live within our means. There Is No Alternative I declared or we will be eaten by a very scary imaginary monster. There can be no turning back.
So a crisis has been averted, I will pay the bank at £150 a month which, as I take home 2k is manageable, no biggie. Five payments clear the debt well before the penal interest kicks in but a strange thing happens when I receive my wages, I only get £1800. When I asked why I was told it was for not spending enough and I had to pay a £200 forfeit. I was furious, of course, but these were the rules I abide by them and after all I’m Doing The Right Thing, that’s very important. It was family gathering time again as I explained my next wages were only £1600 this month leaving only £1450 income for the month. We were I explained in recession which could not have been foreseen, it was time to double down on austerity. The children had to forego one club activity each per week, no shoes for Mrs40 and I would have to really give up pub night and stop pretending to be working extra hours when I was actually tapping my mate Dave for a few pints. That’s what I call Strong and Stable leadership for the me not for you.
In the meantime things were going from bad to worse. The guttering that had been dripping was now gushing causing damp in daughters bedroom and the damp patch on the lounge ceiling started dripping due to a burst pipe. This caused a flood in the room forcing me to call in the insurance company. To pay the excess I had to bump up my overdraft to £1000 meaning I was even more in debt than when I started my austerity drive. My children had disowned me and Mrs40, having bought no shoes for two months, was wondering which would hurt me more, running off with my best mate Dave or my brother. Hell hath no fury like a shoeless Mrs40.
So what is wrong with the admirably spun yarn above? It is the fact that I’m applying the economics of a nation to a household which is every bit as stupid as applying household economics to a nation. The economy of the nation is divided into three distinct pieces, Government, Households and businesses and the external sector. As we import more than we export the external sector is negative. This means that for the government to run a surplus households and businesses must pay more in tax than the government spends. One of the sectors or two must run a deficit for another to run a surplus. It is an accounting impossibility for all three to run a surplus at once. Export led recovery anyone? The sectoral balances hold internationally too we can’t all do it at once. Every surplus in the world must be funded by another’s deficit, it can be no other way.
Now the state can try to tax less than it spends but that has consequences especially if households and businesses are also trying to pay down debt. The more a government cuts spending the less there is to tax. Government Spending = Income. In the H&B sector the more we save or pay off debt the less is spent into the economy and once again, your spending = my income and vice versa. In the event we all stop spending at once recession can be the only outcome. Somebody must break the cycle and it is the state that must do it. After the Great Financial Crash QE was the chosen method to bail out the system along with ultra low interest rates. This meant in practise that asset owners got bailed out and everyone else bailed in. Another crude division would be all those who were not responsible for the crash were forced to pay for it and those that did cause it rewarded.
The core of the sectoral balances is that they must sum to zero, the clue’s in the name. The £50 billion or so deficit we will run this month is £50 billion extra in the private sector. We can cut spending but we are now down to the bone, if it doesn’t stop now the state sector as we know it will cease to exist. Third world levels of spending = third world countries. The chart above clearly shows that state and private sector spending outcomes are a mirror image of each other.
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