Look Both Ways Before Crossing the Street

In my recent journeys to increase my knowledge base in Finance to accelerate my effectiveness as a volunteer director at Cooperative Center FCU, aid in grassroots community economic development, and enrich myself as small business owner, I was recently tipped off about a website that published a 52 week blog tutorial on macro economics called Modern Money Primer. It was written with the average person with no degree in economics in mind. Though I have a business degree and a geeky affinity for big picture theory, I still find it challenging—but you got to start somewhere, right?

In this day and age, more so now we need an educated and activated civic populace-- neighbor to neighbor reaching out and working together. We all need an adequate understanding of economics as it is the primary driver of politics. We are in the middle of a severe financial crisis and we need to face this and each of us put ourselves in a stronger position to sift the good ideas from the bad. Together we can put the pressure on in our local government to get our local area heading in the right direction. Before we can change things we have to know what we are talking about. 

MMP Blog #2 "Basics of Macro Accounting" explores the intimate connections between the Private Sector (Households & Businesses), Government Sector, and Foreign Trade Sector. All must balance with each other. If there is to be a surplus in one sector, there MUST be a deficit in another. Anything else is either magical thinking or political deception.

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

What this shows is often missed in the debates over the deficit. Everything must equal out in the end. This is also basic financial accounting theory and practice- if you add money to one account you have to take money from another account. Every transaction has a debit and a credit. This is also true at the macro level in regards to the national economy, federal budget, and foreign trade. All these terms being thrown around in the debates, taking on buzz word status, are being misused, such as balanced budget, job creation, unemployment, GDP. I am not choosing sides, both democrats and republicans are guilty. But who pays the price is the people as recovery is delayed by inaction and misleading debates. 

For example, if households run a deficit (spending more than we earn) as we did between 2000-2007 maxing out our credit cards, taking on a 2^nd mortgage, etc then surplus is made up in the other sectors Government and Foreign. When the government runs a deficit, as it has since the global financial crisis, we are able to run a surplus in the other sectors-- see MMP#5 The Case of the Great Recession of 2007. 

We have to look at both sides of the equation to find a balance that fuels an economic recovery and a vibrant local business climate. We can't slash government spending because it affects households and businesses. Creating surplus in the private sector, growing the economy, increasing employment and raising real wages requires deficit spending somewhere else. Everything is interconnected. As it is highly unlikely that we will get China and other countries to take trade deficits with us, then the surplus must come from the domestic government sector.  Again, "the sum of deficits and surpluses across the three sectors must equal zero." Watch what you ask for and please look both ways before crossing the street.