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blue trane's Journal: Govt deficits and private surpluses 2

Journal by blue trane
In Gurley and Shaw's Money in a theory of finance, Table 3 on page 29 presents a "social balance sheet" for a "rudimentary finance" economy. In the table, the government's tax receipts are zero, while its purchases of goods and services are 10. So the government runs a deficit, in this "Rudimentary Finance" model. Further on (pages 38-39):

We have shown that real incremental demand for money during growth can be satisfied, in the rudimentary economy, by deflation of prices and money wage rates. But it can be satisfied too by growth in nominal money at stable levels of prices and money wage rates. If price and wage levels are to be stable during growth, the private sectors of the rudimentary economy must maintain surplus budgets and government must run a continuous deficit. The private sectors must save, lend, and accumulate nominal money while government must dissave, borrow, and issue money.

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I think Stephanie Kelton makes a similar point, in What Happens When the Government Tightens its Belt? (Part I) and Part II. From Part I:

Because the economyâ(TM)s financial flows are a closed system - every payment must come from somewhere and end up somewhere - one sectorâ(TM)s surplus is always the other sectorâ(TM)s deficit. As the government "tightens" its belt, it "lightens" its load on the teeter-totter, shifting the relative burden onto you.

This chart drives home the point graphically. Kelton's model is not "rudimentary"; it models the existing economy. Gurley and Shaw are talking about price and wage stability during growth. But the overall idea is the same: public sector deficits are necessary for private sector profits.

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Govt deficits and private surpluses

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