Public deficits are rich’s surpluses

Reducing government deficits is one of the most prominent themes of public debate.

But a related basic fact hardly ever gets mentioned: all deficits are counterbalanced by surpluses, and the sums on both sides are equal.

A deficit occurs when your revenues are less than your outlays in a given period.

Because your outlays are necessarily someone else’s revenues, and your revenues someone else’s outlays, your deficit implies that the rest of the world economy has a net surplus vis-à-vis you exactly equal to your deficit.

If you are the Greek or British government, or any government, the rest of the world economy includes all other economic actors in your country and all economic actors abroad.

For sake of clarity, non government economic actors can be clustered into households and companies.

A public deficit in, say Britain, implies a net combined surplus for households and companies in Britain plus all foreign households, companies and governments dealing with Britain.

In the present climate, a majority of households have serious difficulties covering their expenses. Likewise, many small and medium size businesses are far from enjoying big surpluses.

So where are we to find the surpluses counterbalancing the huge public deficits?

Simply put, they are with winners in the global economic game: multinational companies, their top managers, investors, bankers, accountants, lawyers, and the host of individuals and entities of various kinds gravitating around them.

But what about emerging countries? Aren’t they benefiting from deficits of developed economies?

Yes, in the sense that their exporting companies are enjoying surpluses, and so are their owners, senior managers, and officials having some control over them.

At the end of the day, wherever you look, a very small group of people in the global economy take the lion’s share of surpluses counterbalancing public deficits.

Can this continue for much longer?

To find the answer, let’s bring debts and financial assets in the picture.

If you have a deficit, there are only two things you can do: use some of your savings, or incur debt.

If you have a surplus, there is only one thing you can do: pile up savings.

Savings can be either in financial assets, such as cash, bonds, shares, hedge funds …, or in real assets, such as land, houses, jewellery, gold, wine….

Financial assets are the flip side of the coin of debts and liabilities: they are claims on economic actors who have borrowed (or issued shares).

These days, holders of financial assets face a problem: governments have such high levels of deficits and debts (from past deficits) that they will find it increasingly difficult to honour their obligations.

Which means that sooner rather than later, substantial financial assets will disappear in smoke.

Ah but, say economists, governments will be able to meet their obligations if only the economy grows, allowing government revenues (mainly taxes) to increase, and if government expenditures are squeezed.

We hear this sort of stuff almost daily.

About Greece, Portugal, Spain, Italy, Britain, the US,…and a host of other countries.

The key question is always left unanswered: where will the extra demand for goods and services necessary for growth in the world economy come from?

Governments, whether national, regional, or local, have to reduce their demand.

The vast majority of households can hardly spend more given the squeeze on their incomes and job prospects. As for companies, they are busy minimizing expenses and investments to maintain profits and cash flows.

So where to turn for extra demand in the economy? We are left with the ultimate winners: the rich.

But will the rich, who have enjoyed surpluses and accumulated savings in the past, spend more in the future?

They see that reductions of government deficits will entail smaller surpluses for their businesses, and they see increasing threats to the value of their accumulated savings.

In short, it looks like the end of the road for the present economic set-up.

Frantic growth in the last decades was fuelled by cheap debt as central banks pumped easy money in the system.

But the debt mountain is now so high that confidence in the system is evaporating.

Without confidence, no growth is possible. Without growth the debt mountain cannot be repaid.

Substantial default is thus inevitable; it has already started with Greek bonds. Enormous turbulences will ensue.

This, broadly speaking, is where the world stands in purely financial terms.

As you can appreciate, it is not so difficult to grasp, once you see through the shower of jargon confetti blown in our faces by the system’s experts.

It’s good to be clear once and for all about the global financial story.

We can then put it in a corner and concentrate on the essential: the amazing vibrational and spiritual changes taking place on the planet.

Fear not, enjoy harmony in its delicate manifestations.

Love,

Leo

Copyright © Leo Foresta 2012

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