Friday, December 14, 2012

National Saving and Borrowing

What happens with the society's money? It can be divided up into three segments: 1. What the private (household and business community) does with its net activity (borrow or save/pay down debt) 2. what the government does net (borrow or pay down debt) and 3. what happens with the Current Account Balance (is there a trade surplus or deficit.) Indeed, the three are intimately related: X+Y=Z. If private activity is positive (i.e. savings are generated) and the government activity an equal amount of money borrowed (i.e. deficit equals the savings in the private sector) then the Account Balance is zero.

X+Y always equals Z

100 dollars private savings/debt reduction + 100 dollars government surplus = 200 dollars trade surplus.
100 dollars private debt + 200 dollars government surplus = 100 dollars trade surplus.

When the government starts to run big deficits, the only answer is to have the private sector start to run a surplus or to create some huge trade surplus. The government might look at some things we could export and encourage it.

(N.B. Natural gas in Japan is over $15, compared to $3.78 in the US. In Europe is in double digits.)

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