Money--Whence It Came, Where it Went, and The Rules

The "uses" equation is

Y = C + S + T + M Eq. (2)

where C is the same as in equation (1) and

S = Private sector Savings (available to be spent)

T = Taxes (a Private sector expense)

M = Imports.

These two equations yield the same result (except, perhaps for a small discrepancy due to slight differences in the data collection methods). This possible small discrepancy will be ignored here.

Because these two equations yield the same result, Y, we can set the right sides of the equations equal to each other. Manipulating the resulting equation we can get the standard form of the Sectoral Balances Identity,

(S-I) =* (G-T) + (X-M). Eq. (3)

*This should be the identity sign, but I don't have it.

In English, this equation says

private sector surplus is identically equal to government sector surplus plus the foreign trade sector surplus

When one of the three terms is negative it indicates a deficit for that sector. Positive terms indicate a sector surplus.

This equation is an identity. That is, for any given reporting period, it always holds true when the appropriate NIPA data are entered into the equation. If the private sector term, (S-I), is negative, then the two terms on the right will sum to a negative number identical to (S-I). In other words, government spending and the status of the foreign trade sector determine whether the private sector is in surplus or in deficit. When the private sector is non-negative the private sector is healthy. When it is negative there is austerity.

The following is the most important difference between our fiat money system and a gold standard system.

If the government wanted to prevent austerity it has the power to do that by adjusting government spending as needed to make (S-I) non-negative. Can the government do that? The answer is YES, because in a fiat currency system where the sovereign is in control, government spending is not limited by any constraints. Why would a government do that? The money so created could be used to fund important, needed infrastructure construction and maintenance, for example.

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