Episode 2 - The Deficit Puzzle

Recorded 5 July 2015


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Introduction

Intro music - Money by Von Korf

What is a deficit?

1m03s

• Related blog post
• Difference between government spending and tax revenue
• Deficit is synonymous with government borrowing
• Deficit tends to be considered a 'bad thing'

Empirical data

6m53s

• UK and US governments in deficit >80% of time since WWII
• "Books not balanced" annually or over "business cycle"
• Large net, cumulative deficit - the government debt
• Are deficits really bad or something else going on?

Plenilune - Joram

Spending and saving

12m15s

• Equivalence of spending and income
• Stock of money and velocity of money
• Trade off between unemployment and inflation
• Savings are a leakage of spending from economy
• Banks do not recycle savings

What government debt is

24m46s

• Government recycles savings when it "borrows"
• Financial industry (e.g. banks, pension funds) "save" in government debt
• Debt of currency-issuing governments have zero default risk

Night - Tramo

What if?

32m45s

• What if the public don't want to save?
• What if the government doesn't want to run a deficit?
• Deficit dependent on tax revenue which varies with economic conditions
• Deficit as a measure of private sector savings desires
• Government debt is the net savings of the private sector

Foreign trade

44m43s

• UK has a trade deficit
• Trade deficit is a leakage of demand abroad
• Government recycles money earned by exporting nations by swapping for government debt
• ~25% of UK government debt is held by foreigners

Your reflection in the water - Dave Preston

Can the government pay off its debt?

50m19s

• Public and financial industry want government debt
• Importance of central bank

Rich in loss - Sandeep Bhandari