The cumulative deficit is obtained by summing all yearly govt deficits (= negative net_worths) after correcting for inflation using the GDP inflation factors published by Bureau of Economic Analysis. This cumulative sum is on the order of ten times the yearly deficit. For 2011 the deficit is 8746.2 billion and the cumulative deficit is 87120.5 billion in 2005 dollars. And the cumulated external account is $31788.4 in billion in 2005 dollars. The excel sheet S.7.a. Federal Govt says that many things are not counted in this sheet. The net worth of the govt sector is the entry FL312090095 in sheet A007 Ann. The net worth external is FL262090095 and is given in A009 Ann, S. 9 a. Rest of the world which is the external account.

Note. The Federal government accounts exclude Federal employee retirement funds (1) Government-sponsored enterprises (GSEs) consist of Federal Home Loan Banks, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, Farm Credit System, the Financing Corporation, and the Resolution Funding Corporation, and they included the Student Loan Marketing Association until it was fully privatized in the fourth quarter of 2004. (2) The statistical discrepancy is the difference between net lending or net borrowing derived in the capital account and the same concept derived in the financial account. The discrepancy reflects differences in source data, timing of recorded flows, and other statistical differences between the capital and financial accounts.(3) Excludes land and non-produced non-financial assets and  IMF International Monetary Fund.

The GDP inflation factor is 100% at year 2005 and decreases to 23% in 1969. Because I am using data from 1960 to 2011, I am setting this factor to 20% from 1960 to 1968. This can be corrected later. The yearly adjusted numbers are given by

(100/factor )* FL312090095 etc., in 2005 dollars.

The cumulative values are obtained by the running total of yearly values. Net worth household is already cumulative. The govt net worth and external are summed as indicated.

Peoples’ wealth is defined as the net worth of household and nonprofit sectors of the economy (FL152090005 in sheet A003).  In the USA, the figure regularly reported by the Federal Reserve of the US is household net worth, and includes corporations as they are essentially owned by American households.(?) from                       http://en.wikipedia.org/wiki/National_wealth

This includes foreign deposits, ownership of corporate and foreign bonds, real estate, financial assets, and mortgages.

a)     Federal Deficits – Net Imports = Net Private Savings, is strictly true. See fig4 of http://pragcap.com/understanding-modern-monetary-syste

If this equation is summed over all years, we get

b)     Cumulative Federal Deficits – Cumulative Net Imports = Cumulative Private Savings, or,

c)     Cumulative govt “debt” = national wealth.

The last equation is my definition of govt debt which is the left hand side of b). This definition accounts for the foreign sector also.

I did this plot again using the latest data and will either replace or add to the one in my web site. I adjusted the initial govt at 1960 by adding 9000 to (–govt net worth – net worth ext)

The cumulative deficit vs. household net worth

This is now close to a line with slope 1 passing through zero except for the wild fluctuations in recent yesrs due to bank failures and wars.

FIG 6 :   This is a plot of yearly GDP and yearly deficits in unadjusted dollars starting from 1960 ending in 2010. The deficit is increasing slowly from 1960 to 1972 during the days of gold standard. From 1972 to 2000 GDP increases as the deficit is decreasing with a slope equal to 4000billion in 500 billion or 8.  For 1 dollar of deficit GDP changes by $8. After this deficits increase again and the GDP rises more slowly. GDP changes by 1000 billion for a deficit change of 300 billion, a slope of 3. In the region of falling deficits the slope is larger, near 8. Most recent data shows deficits increasing a lot and the GDP falling. This is the region of Wall street gambling, mortgage crisis, trillion dollar wars etc. which have done nothing good to the economy.

Data for this is from Section S – FedBeaSna  : A001  S. 1.a Total Economy-Current account combined with A007 Federal Govt for deficits.

FIG 6 Deficits vs. GDP

Another proof of MMT.  This is a plot of gross national wealth on the x axis plotted vs. the same quantity in the same year minus govt deficit minus External balance. The years start at 1960 and end at 2011.The plot combines BEA Section S A007 S.7 a Federal Govt and A003 S.3 .a. Households and Nonprofit Institutions Serving Households. (FL152090005  minus  FL312090095 minus FL262090095)  is the value along the y axis which agrees with the household net worth   FL152090005. Each (deficit plus net export) adds to peoples’ wealth. The dollars are current values not adjusted for inflation.

Another way of thinking about the plot is as a plot of actual wealth on the x axis compared to the predicted  wealth calculated using the MMT equations of balance which is also used by

http://www.bea.gov/national/nipaweb/Ni_FedBeaSna/DownSS2.asp?3Place=N

The xl files were downloaded from the above website.

(Federal Deficits = Net Private Savings+ net imports), applies to USA and other nations that have their own currencies.  Both federal deficits and net exports add to private savings.

 

Originally posted on pshakkottai:

the economy

The diagram shows flows of money in blue and stocks at year end . GDP is the level of money in a holding tank at the end of the year. The government pours money into this tank and a counter keeps track of the outflow. Money flows through household and industrial sectors which exchange money between them and the money flows out to taxes and exports. A counter measures the tax flow which is counted. Money also flows from imports into the GDP tank. The counter readings also refer to conditions at year end.

(Counter_out) – (counter_in) is the deficit in the simple case with no external trade. With trade we add counters to imports and exports. Govt spending and imports feed GDP and taxes and exports remove GDP. In the diagram counters are not shown for imports and exports. The cumulative deficit is merely the number of…

View original 128 more words

National wealthThere are 3 figures attached with these notes.
Fig 1. The x axis is the sum of T securities, savings bonds, other treasury and agency backed Govt supported enterprises (which are components of govt debt) in a year in current dollars. The y axis is the national wealth in the same units. Addition of yearly numbers for components of govt debt to get a cumulative number is not correct because of inflation. This requires an inflation correction using data from Table 1.1.9. Implicit Price Deflators for Gross Domestic Product, [Index numbers, 2005=100], Bureau of Economic Analysis.
Fig. 2. This plot shows the national debt on the x axis and national wealth on the y axis in current billion dollars. This shows that the gross national wealth is slightly more than the national debt. The slope is 3/2.The dollars are current dollars and have not been adjusted for inflation.
Fig. 3. Slope is near 1. Net worth is approximately equal to national debt. The data is from

http://www.federalreserve.gov/releases/z1/

Cumulative Govt deficit becomes Gross national wealth. Modern Monetary Theory (MMT)  is correct! “Unsustainable debt” is just nonsense.

Bushido, the warrior code says:
1. Think of what is right and true.
2. Put the science into practice.
3. Become acquainted with the arts.
4. Understand the negative and positive qualities in everything.
5. Learn to see everything accurately.
6. Become aware of what is not obvious.
7. Be careful even in small matters.
8. Don’t do anything useless.
This is about items 4, 5, 6, 7, and 8 for people who dabble in economy like me.

The biggest problem in public analysis is the economic illiteracy of mainstream media, congress, president and neo-liberal economists who confuse the budgets of USA (the currency issuer) with budgets of everybody else (currency users). Scare words like “unsustainable debt”, “living beyond our means”, “debt crisis” etc. are used and comparisons made to household budgets, a totally incorrect analogy. The dollar is basically a token that keeps the economy running.
Modern Monetary Theory is true. Lots of data is in conformity with it. Deficits are good, surplus is bad, govt debt implies private sector wealth, national debt need not be paid back, USA does not need taxes to spend, the debt/GDP does not mean anything for a monetarily sovereign nation, China does not fund our economy, inflation is not a risk until full employment is reached, USA can afford to bailout the states and stop all austerity. Almost everything said in the mainstream media is wrong. The congress and the president repeat talking point economics as does Fox News. It is a shame!
Income taxes play a minor role in macroeconomics. There is no urgency in fixing taxation. It is a major distraction to allow any useful action. Immediate deficit funding is what is required. Taxation has a role in income equality and inflation control and can be attended to later because right now the plutocracy is in control. Government creates money and the economy uses it.

http://pshakkottai.wordpress.com/2011/11/23/how-the-economy-works-a-diagram/
a) Federal Deficits – Net Imports = Net Private Savings is strictly true.

Government creates money and the economy uses it.  Govt “debt” is the sum of all deficits and appears on one side of the equation whereas the private sector “debt” means negative savings. Govt deficit is the source of money.
Govt “debt” is the same as private savings. These are in the form of the govt bonds held by citizens, pension funds and so on. If the national debt is paid off lots of citizens will be unhappy. The interest also flows into the private sector. The two key equations in economics which apply to any system of govt are a) and b):

A numerical proof of (a) is shown in figure 4 of

http://pragcap.com/resources/understanding-modern-monetary-system
b) Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports.
The GDP has been approximately 5 times govt spending.
Actual data is in
http://pshakkottai.wordpress.com/2011/10/16/
http://www.davemanuel.com/charts2/surpluses_and_deficits_1940-2011.html  shows deficits have been quite common (58 deficits out of 70 years).

The household net worth of USA is $58.5 Trillion. The national debt is $14 T. The ratio is near 5.

GDP is about the same, $14T/yr. The ratio of GDP/yr to govt spending/yr has been about 5 over the years.
“The currency issuer is the monopoly producer of money and, just as every asset has a liability, also results in government liabilities. The issuer’s liabilities, or “debt”, is a digital account of the currency supply used by the currency users. To a fiat currency issuer, the currency supply is a digital accounting tool, not an asset in and of itself. The currency supply is simply the bookkeeping records corresponding to all the currency users’ savings in banknotes, deposits, and treasuries.
Money functions as both a store of value and a medium of exchange. When users acquire dollars they can spend them for items in the marketplace or choose to save them as banknotes, deposits, and treasuries.
The more users choose to save the more “debt” the issuer takes on. A common misconception is that currency issuers “borrow” money. The issuer does not borrow because it is the monopoly producer of the currency – the money that currency users spend or save. This is simply double entry accounting.
Savings by currency users, domestic or foreign, is a straightforward concept on an individual level but becomes counter intuitive on a macro level.” from

http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.html

Which has nice sketches to explain  MMT.


debt to GDP and G to tax data Because there is a lot of misinformation about taxes and debt and GDP, I added this post. The figure shows two plots one with a scale in years and the other non-dimensional. Blue dots show (debt/GDP)  in years and the red rectangles show( government spending/tax receipts). In the war years both debts and government spending had peaks, 2.5 yr debt and 3.3 for spending/tax.  After 1949 government spending is near tax income but generally somewhat more. Sources: Department of Commerce (Bureau of Economic Analysis), Department of the Treasury, and Office of Management and Budget.

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