I was assembling a post about how our public debt is a problem not because of it’s size per se, but because of it’s size as compared to our ability to pay. It is one thing to have a lot of public debt but very low private debt, which would allow a tax structure that could pay off the debt, but we keep spending like there is a pool of cash to pay with when there really isn’t, the populace has so much consumer debt that there isn’t anything to pay the public debt with. Yes if it weren’t for the wars and the Bush tax cuts things would be rosy, and yes we can always bleed the wealthy and those pesky corporations but there is a far more basic problem, that is that our basic model is totally screwed up, and that is why we are doomed to travel in these endless debt cycles that end in defaults. Remember these cycles go as far back as there is history, farther back than banks, even into times when all you had to do with debtors was make them your slaves, or have them sell you their children as slaves.
Let’s take a look at how an economy like ours would function in a small community, spreadsheet style.
Now as we can see wages are equal to the selling price of widgets, so everyone is happy and the loop is closed, the accounts are balanced. Lets take a look at what happens when the owner decides to take a profit out of what is made.
Now as we can see workers are running a deficit, debt is required to continue purchasing widgets. This can be offset by having the owner also buy a widget, but it flies in the face of the purpose of being an owner. After all the purpose of making a profit is to accumulate wealth, to continually skim off and retain a portion of what is being circulated. This is the point of being either an owner or a king. Two things may be of interest, lowering the price of widgets, or workers delaying purchasing them, illustrated below.
O.k. so for brevities sake we dropped the price of widgets, had workers delay some of their purchase, and had the owner buy some of a widget, yet the shortfall remains. The reason the shortfall remains is that ultimately wages are tied to business income, if the price of widgets drops what people earn making them must drop also. Now in the real world this, of course, doesn’t happen so easily, wages are sticky as they like to say, but people cannot be paid more than can be made from what they create. If we really run this in favor of workers what happens is that the owner starts running a deficit, and that is another not very realistic scenario.
Let’s take a look at a real world scenario, one in which the percentages more closely reflect actual distributions.
We can assume that expenses cover anything and everything that isn’t directly related to production, and that the money used to cover expenses is used to buy widgets. The “owner” is aggregate for all owners, the “widgets” the only thing to buy, etc. (You have, no doubt, noticed the “thingamajig” entry, this is because the spreadsheet has been set up to run scenarios were trade is involved, but that hasn’t been necessary to use in setting out the basic argument). We still have the owner buying a bit of widgets, and the shortfall is again pronounced.
So by this view in order for accounts to balance all funds must remain in circulation, as soon as anything is taken away debt results, profit creates debt, it is inevitable. Now the true way to get out of this is to sell widgets to someone else, someone you don’t have to pay wages to. This is why there are saving societies, Germany, China, Japan, they are all export countries, they have found someone to sell widgets to, they have transferred the debt element to them. In countries that do manage private savings while not having export economies you will most likely see public debt making up the shortfall.
In reality saving would create the same effect, and that points to one of the perverse aspects of this system, people save which results in a need for debt somewhere down the line, saving pays less than debt costs, who wins?
Now there are many influences on the system which keep it from just out and out crashing instantly. Moving workers from low productivity to high productivity jobs, the continual rise and fall of players within the system, injections of funds by central banks, etc. But the above scenarios are the bedrock of what everything is built on, nice huh?
None of this is really new, in many respects it is simple accounting, but we ignore that in favor of the magic of economics. Think about those invisible hands, the whole imagery involved is one of a mysterious force that impels economies forward, best not look behind the curtain, the Wizard of Oz is not quite what you think. Hopefully this incredibly simple exercise will help illustrate, however, why it is so easy for debt cycles to happen.