Friday, May 18, 2012

Simple Math Overview #1 ... Spending and Borrowing

Economic growth results from income generated or production. We can't spend or consume that which hasn't been earned or produced.

Here's some simple math.

(1) Income or production is essential before consumption and savings can occur.

(2) The balancing factor to consumption and savings is spending and investment.

Consumption + savings = spending + investment.

Thus, the math is simple: income can be spent or invested by consuming or saving.

When we spend more than we produce, negative savings results. That's called indebtedness or borrowing.

Those loans will have to repaid later with interest out of future income.

In addition, that means we have less to invest.

Even the politicians can understand that. So can We the People.

The simple math formula looks like this. Income - consumption = savings.  Spending plus investment = income.

If spending is greater than income, no savings occur. That results in negative savings or new borrowings.

New borrowing lead to more indebtedness to be repaid with interest out of future income.

In addition, when we borrow to spend, we have less prior accumulated wealth left to invest.

Now here's some simple truth about government.

Government taking money from what begins as private sector income doesn't create any additional total income. It just takes money from one person and redistributes most of that which it takes to another person.

From person A to person B through G, aka government, doesn't increase income, even if it's called economic stimulus.

In the next several posts, we'll try to make more sense out of this simple math and what it means.

Suffice it to say that innovative, creative and enterprising private sector participants taking responsible risks are essential to generating income or wealth before it can be consumed, saved, spent or invested.

Living beyond our means, long encouraged by progressive politicians and now embraced by too many of We the People leading us to the cliff.

So is "path dependence." But we already know that.

The question is a simple one: What and when will we do something about it?

Thanks. Bob.