1. cash, as demanded by the non govt sectors

2. reserve balances at the cb

3. Tsy secs at the cb

Without out tsy secs the net financial assets consist of just reserves at the cb and whatever cash is demanded by the ‘economy.’

hope this helps!

In this blog you state that the financial saving is the normal counter part of the public deficit.
In the Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System, you wrote
Proposals for the Treasury
1. I would cease all issuance of Treasury securities. Instead any deficit spending would
accumulate as excess reserve balances at the Fed.
The two assertions seem contradictory. With your proposals, what would bee the counter part of the private saving?

Sincerly yours
R. PALLU DE LA BARRIERE

I agree with you when you say there is a strong link between the governmental deficit and the increase of private financial assets. But the strict (fundamental)equality between the deficit and the increase of private financial assets is questionable.

If the government is confronted with a deficit, he has other possibilities than issuing bonds (or obligations).

First he can be passive: do nothing and let the expenses surpass the receipts (in french: laisser filer le deficit). The private sector receives more than he spends. People have money but the stores are empty. Inflation is menacing and the government must control food and housing prices. This situation must be avoided but is structurally possible.

A other possibility for the government is to borrow money from a commercial bank (or several banks) The ECB gives the following statistics:

Domestic credit
Euro billions (SA) Jan/10 15,921.5 Credit to general government in the euro area
Euro billions (SA) Jan/10 2,863.6
link
Hence governments used 18% of loans issued by private banks. The fundamental equality is not violated if the claims of commercial banks are considered as financial assets.

A fourth option for the government is to ask the central bank to subscribe to governmental bonds. This is the “monetizing debt” option. It is not available in Europe.

Conclusion: In many cases there are discrepancies with respect to the fundamental equality. But in any case we can assert that in the absence of deficit there is no private financial saving.

R. PALLU DE LA BARRIERE

Short example:

An economy consisting of 1 baker and 1 shoemaker.

Day 1: baker produces extra loaf of bread and shoemaker produces extra pair of shoes. They agree to exchange them.

Day 2: they produce the same things, the shoemaker again wants the bread, but the baker doesn’t want another pair of shoes (in effect there is shoe producing excess capacity). He sells bread to the shoemaker on credit. It makes no sense for the shoemaker to make more shoes, so he becomes unemployed.

Now the government steps in with deficit spending and buys the shoes from the shoemaker. The baker’s credit has become worthless (there are no shoes to buy).

The shoemaker is employed again, there is no excess capacity and there is full employment.

But is it the best alternative to keep producing shoes that nobody wants, just to keep the shoemaker employed and to keep capacity fully utilized (to prevent the baker from savings)?

Manny:

I think I understand your point, but I don’t believe that being unemployed automatically means turning to crime.

To me, being unemployed means that there is no demand for my skills. My reaction would be to learn new skills for which demand exists. If the government steps in and creates an artificial demand for my old skills, am I likely to learn some new skill?