Balancing Act

On last comment on what has been a busy day.

People seem to forget the consequences of accounting. Stuff has to balance. Debits and credits. To and fro. Up and down. Action and reaction. To which we can add: private and public.

One of the features of our discussion over American public finances is that we need to keep an eye on private finances as well. The flows of one are, by and large, the counter-flows of the other. A move to saving in one implies a move to dissaving in the other.

Since the great crisis erupted in the late 2000’s the private sector in the US has shifted dramatically from deficit to surplus. This was accommodated – that’s one way of looking at it – by an equally dramatic shift in the public sector towards greater indebtedness.

The debits and credits still added up. Things were kept in rough balance.

The private sector’s need to get its house in order and to reduce its debt, made it necessary for government to go deeper into debt.

Imagine what would have happened had the government tried to get out of debt at the same time.

Actually you don’t need to imagine it. Just look up stories from the 1930’s.

When both private and public sectors go into austerity mode at the same time the economy is plunged into depression. Big depression.

This is a lesson we learned the hard way back in the 1930’s.

Apparently quite a few people seem to ignore history. That’s a shame. They need remedial accounting  let alone remedial economics instruction.