In his latest FT column, Martin Wolf gets right to the heart of the matter, explaining why you can’t simultaneously “cut deficits” and grow an economy at the same time when the private sector has too much debt.
If the government wishes to cut its deficits, other sectors must save less. The questions are which and how. What the government has not admitted is that the only actors able to save less now are corporations. The government’s – not surprisingly, unstated – policy is to demolish corporate profits.
Net lending – the difference between savings and investment – of all sectors of an economy must add up to zero. If the government is running a huge financial deficit – that is, spending vastly more than its revenue – then other sectors must be spending much less than their income. And so, indeed, they are.
Wolf, here, is referring to the Cameron government in the UK, but obviously could be talking about the US, or any other country where spending cuts is a priority.
As a visual reminder of what Wolf is talking about, we bring you back this chart — which you’ve probably seen several times — pointing out that government deficits and private surpluses end up netting out to zero.