A reply on a Krugman article (http://krugman.blogs.nytimes.com/2011/08/12/the-cracked-conservative-mirror/) stated this, and I just can't wrap my mind around it:
Private sector cannot realize profits in monetary sense unless the govt issues the appropriate deficit, a conclusion that is mathematically true, but which "free marketers" absolutely hate. http://www.levyforecast.com/assets/Profits.pdf Government deficits are necessary for economic growth, period. http://www.tnr.com/article/politics/93365/no-long-term-deficit-problem
Is this guy making any sense?
Fool on the Hill:Apple creates a surplus of money by creating a deficit of goods (i.e. non-money). This transaction also makes non-Apple have a surplus of goods and deficit of money. What can Apple do with its surplus of money? Only one thing: exchange it back to non-Apple for goods. Thus, in this sense, Apple's profits do represent a form of credit, a form of borrowing and lending.
Amazing. So the pear in your hand represents your surplus of fruit but also your deficit of sh*t? You borrowed it from non-you so you can return it back to non-you as energy + bowel movement? You may be onto something grounbreaking here.
I agree with pretty much everything you've said, but the fact that the private sector can not make a profit in dollars without the government running a deficit in dollars does not at all imply that deficts are necessary for economic growth.
They are necessary for economic growth if you measure economic growth in monetary terms. A business is considered profitable if it has more money than it started with. Thus, the private sector as a whole can only be considered profitable if it has more money than what it started with, thus the government must run a deficit. Of course I agree with you that having more money in the economy is not necessarily desirable. Having money itself is virtually useless. Only getting rid of it is useful. (I think this means we agree on everything now.)
The equation is true, but the wording is incorrect. If instead of calling it "surplus" and also calling it "profit", as you have done in earlier posts, you called it "damaged" or "loss", then we would alll be on the same page. Thus, privated sector damaged= govt deficit. Yes, that is absolutely true. Or private sector loss= govt deficit, that's true also.
The equation is true, but the wording is incorrect. If instead of calling it "surplus" and also calling it "profit", as you have done in earlier posts, you called it "damaged" or "loss", then we would alll be on the same page.
Thus, privated sector damaged= govt deficit. Yes, that is absolutely true. Or private sector loss= govt deficit, that's true also.
No objections here.
Mises defined a monetary crank, or what we would call a monetary lunatic, as someone who suggests a method for making everybody prosperous by monetary measures. To see if you understand AE [even though you may disagree], can you explain why he made such a statement? Do you know how he thought everybody can prosper?
Admittedly, I don't know all that much about AE (that's why I'm here). I'm guessing he meant that everyone desires different things, so just giving everyone money doesn't give anyone what they want. It's what money is exchangeable for that is important.
In the example you gave, of the govt taking away private sector gold and handing them paper money in return, I cannot call that "the private sector realizing a surplus of gold". In fact, I find it hard to grasp any sane person calling it that. I could agree to calling it a "loss" of gold, or a "damage" to the private sector gold supply. If you will humor me with that tiny technical detail, then we will be in agreement.
Yes, I would call it a loss, especially considering a bank would charge a storage fee. Imagine if I exchanged 100 lb of gold for $100. The bank charges me 5% per year to store it. In 20 years I'll have no money or gold. Thus, what's really going on is the bank is issuing me a loan and using my gold as collateral. There's another problem though, how do I get the money to pay the interest? The only way is to acquire more gold and exchange it for money. So after the first year, I deposit 5 lb of gold and receive $5 to pay the interest. But that $5 is also debt, so next year I owe $6 in interest. In order to keep what I have, I have to increase my productivity 5% every year, compounded annually. There are only two other options: default or foreclosure. In defaulting, I somehow get to keep the gold without paying back the full value of the loan. In foreclosure, the bank gains permanent ownership over the gold. The only way to service debt is with more debt. No wonder so many people had to foreclose on their home mortgages. It's not their fault, it had to happen to someone. On the other hand, the financial institutions had the luxury to default. Hmm...
Money = Debt
Another thing I just realized. Since money is debt, then any unpaid interest on the money must be paid before ownership is transferred. This is what a sales tax does. Same for income tax for that matter. And if you try to withdraw your gold at the end of the first year, you'll only get 95 lb of gold for $100. Thus, inflation has occurred without an increase in the money supply.
Inflation = Interest/Taxation
And one last equation:
Money = Root of all evil
0. Troll
1. You DON't calculate interest paid by multiplying the 1st year principle amount by APR*(number of years).
2. Gold storage is a service that you may elect to utilize. Payment for services rendered is NOT inflation.
3. LOVE of money is the root of all evil - it's an aphorism, not an equation.
Smiling Dave:Replace "govt" with "Joes Car Wash" and you get the conclusion that there can be no profit for the country as a whole unless joes car wash is trillions of dollars in debt
I guess the key phrase is "in monetary sense" then. We can only have more money (profit in monetary sense) if someone prints that extra money (government debt). Big deal, lol. Profit in monetary sense is worthless since it's just more paper money without any increase in real wealth.
How do you calculate it?
Every payment is for a service you may elect to utilize. By your defintion, nothing is inflation.
I recently came across some interesting articles by anthropologist David Graeber, whose new book Debt: The First 5,000 Years presents research suggesting that money originated as debt.
DG: If you pick up an economic textbook, it’ll tell you that once upon a time (it literally deserves such an introduction, it’s a fairy tale) there was no money, so people engaged in barter: “I’ll give you twenty chickens for that cow”, that sort of thing. If the guy doesn’t want chickens, you’re out of luck—so you have to go invent money. Gradually, this gives birth to more sophisticated financial forms like paper money, complex credit operations, securitized derivatives… Problem is that, as anthropologists have known for years, it just isn’t true. No one has ever found an economy based on barter (and believe me, they’ve been looking.) Actually it’s not just wrong, it’s backwards: credit systems come first, coinage is invented at least two thousand years later, and barter… well, when it does occur, it’s usually because people are used to using money, but somehow the money supply disappears, as it did, say, in Russia with the collapse of the Soviet Union. But if credit systems are the original form of money, that gives great support to those economists—and among economists, they are decidedly the minority—who argue that money really is debt; or, better perhaps, a system of accounting that allows us to keep track of credits and debts. That realization has profound implications.
http://comradshaw.wordpress.com/2011/07/30/an-interview-with-david-graeber-debts-history-implications-and-critical-perspective/
http://www.metamute.org/en/content/debt_the_first_five_thousand_years
http://www.canopycanopycanopy.com/10/to_have_is_to_owe
that gives great support to those economists—and among economists, they are decidedly the minority—who argue that money really is debt; or, better perhaps, a system of accounting that allows us to keep track of credits and debts.
Riddle: What logical fallacy is he committing? Hint: try and lay out his argument as a syllogism.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I did not read kregmans article but based on the title.
If private sector does not make a surplus then it will go bankrupt, well some of the private sector, unless they are close friends with the government. But the government, surplus is not in their vocabulary. Why would you need to run a surplus when they can just lend more money with the only risk being that lenders might stop lending.
There is no direct relationship between private sector surplus and a public sector deficit. The only relationship is that the government misappropriates from the private sector. Some might argue that the more surplus the private sector experiences, the more the government spends. But this is not a direct relationship. It just the more money people make the more the government wants to take and spend.
Please correct me if i am completely wrong.
Begging the question? Genetic fallacy? I'm not sure that he is really trying to make a logical argument in the section you quote, but rather transferring his previous conclusion into different terms.
Are you talking about a surplus and a deficit in money? When people say the government has a deficit, they're not saying it doesn't have money, they are saying that it owes money. A surplus then would be when money is owed to you. The private sector willingly loans the money (i.e. they buy bonds). The real misappropriation (it seems to me) is when the government taxes people to pay back the debt. The bondholders essentially steal money from the non-bondholders.
The fallacy is non sequitor, i.e the conclusion does not follow from the assumptions.
Do you know enough logic to test whether this is true? If not, you will be sold many a Brooklyn Bridge until you do.
Fool on the Hill: Are you talking about a surplus and a deficit in money? When people say the government has a deficit, they're not saying it doesn't have money, they are saying that it owes money. A surplus then would be when money is owed to you. The private sector willingly loans the money (i.e. they buy bonds). The real misappropriation (it seems to me) is when the government taxes people to pay back the debt. The bondholders essentially steal money from the non-bondholders.
I am talking about a government budget deficit or surplus. The private sector profits are rarely called a private sector surplus. Only a socialist would look at all the private sector profit as one and called it a surplus and try to equate it to government budget deficit. No matter how much profit the private sector experiences, the government can spend less or more, it makes no difference, because they can just loan money. The government could also, if they chose, spend less and run a surplus for once, regardless of the private sector performance.
You've got this half right. The moral issue is, yes, that bonds are repaid with coerced tax dollars, or new printed money. However, part of the misappropriation is that the government, in sucking up private investment via bonds, inhibits the creation of new, productive investments. Instead of risking thier money in entrepreneurial activity, creating new value via productivity and an increase in wealth, they hand the money over to the government in exchange for a modest, "safe" return on their money. The implication is that they are essentially purchasing a portion of future tax revenue, assuming the money isn't printed into existance.
This has the effect of directing lots of resources from potential new buisness ventures, and instead distributes them to the various government projects, which may or may not be increasing wealth in the society. For example, instead of money being invested in a new shoe factory, it's invested in new tanks and fighter jets. This has the effect of building new fighter jet and tank factories, but the question is "do we really need more of these"? For the weapon producers, the answer is probably yes. But for society at large? Probably not. This goes down the line through most government expenditures. Do we really need that new bridge? Well, the bridge might actually be needed and useful. It may benefit the people who will use it greatly, but how do you know if it's a net wealth producer for society? How do you know that those resources wouldn't be better invested elsewhere? This is the classic seen-and-unseen problem, combined with the inability of a state enterprise to calculate proper prices without the profit-loss model.
Tying this back into the original question, does "private sector surplus = government deficit"? Partially. The government's deficit is limited by the amount of bonds they can sell, and this is limited by the "surplus" profits available in the private sector. However the private sector surplus is not limited by government deficit, as they can produce more wealth independent of government action.
Could you tell me specifically what you think the assumptions are and what you think the conclusion is? From what I can tell, you only quoted the conclusion. Are you saying that the assumption is that money was originally debt and that the conclusion is that it is currently debt?
The government could also, if they chose, spend less and run a surplus for once, regardless of the private sector performance.
If they ran a surplus, they would be taking money out of circulation. I'm not sure what you mean by performance. How do you measure it?