Tuesday, 14 July 2015

Episode 2 - The Deficit Puzzle

Recorded 5 July 2015



Intro music - Money by Von Korf

What is a deficit?

  • Related blog post
  • Difference between government spending and tax revenue
  • Deficit is synonymous with government borrowing
  • Deficit tends to be considered a 'bad thing'

Empirical data

  • UK and US governments in deficit >80% of time since WWII
  • "Books not balanced" annually or over "business cycle"
  • Large net, cumulative deficit - the government debt
  • Are deficits really bad or something else going on?

Spending and saving

  • Equivalence of spending and income
  • Stock of money and velocity of money
  • Trade off between unemployment and inflation
  • Savings are a leakage of spending from economy
  • Banks do not recycle savings

What government debt is

  • Government recycles savings when it "borrows"
  • Financial industry (e.g. banks, pension funds) "save" in government debt
  • Debt of currency-issuing governments have zero default risk

What if?

  • What if the public don't want to save?
  • What if the government doesn't want to run a deficit?
  • Deficit dependent on tax revenue which varies with economic conditions
  • Deficit as a measure of private sector savings desires
  • Government debt is the net savings of the private sector

Foreign trade

  • UK has a trade deficit
  • Trade deficit is a leakage of demand abroad
  • Government recycles money earned by exporting nations by swapping for government debt
  • ~25% of UK government debt is held by foreigners

Can the government pay off its debt?

  • Public and financial industry want government debt
  • Importance of central bank
Rich in loss - Sandeep Bhandari

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