Wednesday, July 15, 2009

Paid Out Equity

Nobel Prize winning Economist and NYTimes Op Ed writer Paul Krugman continues to struggle with basic accounting:
That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.
Ya think? Given that Federal deficits fund private savings, and the only thing driving Federal deficits (since the Obama stimulus is too slow) is unemployment, and the automatic stabilizers it triggers, that maybe automatic stabilizers have, you know, been automatically stabilizing? Maybe? Might this also clue you into why people are against more slow, politically directed spending (aka the Second Stimulus?) Might you rethink the benefit of increasing deficit spending via a payroll tax holiday?

A long time ago, I had a conversation with JKH somewhere in Interfluidity about what a consolidated Federal Balance sheet might look like. I was resistant to the usefulness of the notion because, as the Federal Government must be cash flow negative, it must have negative equity on its balance sheet, and that was just too weird for me. Would this exercise "prove" that the Federal Government must be bankrupt?!

Anyway, I figured out how to think of that negative equity entry in the liability column: very simply, it's paid out equity, the perfect mirror image to private sector balance sheets that also captures how Government spending gives the private sector the money it needs to pay taxes, and net save.


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