Wednesday, May 1, 2013

The Villages of Deficit and Surplus

Hiram has proposed the following thought experiment:
"Lets assume that there are two villages close to each other. Surplus is full of hard working citizens who create lots of products both for their own consumption, and for export. Deficit is full of citizens who maybe also work but not very productively. It's a poor community, and it also is Surplus principal export market. Let's assume both share the same currency, the Euro, or gold perhaps. Deficit, being poor, has bought goods from surplus on credit extended by Surplus's bankers. At some point, Deficit runs out of money. All the Euros, all the gold, it has must go to Surplus and it's bankers to pay off the debt. Lots of consequences flow from this. For one thing, Deficit has no money with which to conduct ordinary transactions. it's all gone to Surplus. Employees are not hired because employers have no money to pay them. Investment doesn't happen because there is no money with which to invest. There are other consequences as well. The impact of Deficit's situation has an impact on Surplus as well. The loans they made aren't being paid back. The factories they built to create product for export to Deficit lie idle because Deficit has no money to buy the product.

So, what's the solution? Or maybe the first question to ask is whether there is or what is the nature of the problem."  Hiram


Thoughts?

38 comments:

John said...

It seems to me that Surplus should be finding more affluent trading partners. Folks who are both effective and efficient.

Deficit's citizens sure aren't going to learn the error of their ways if Surplus bails them out.

Anonymous said...

Seems to me that Deficit has a simple solution staring them in the face. They simply print up vast quantities of new currency and use that to continue their profligate ways. Of course, Surplus will use those reserves of new currency to buy up everything in Deficit, so the citizens will have even less of what they have now, until the folks from Surplus start running the place efficiently and effectively, to where everybody has a job. Of course, the long period of idleness that put the citizens of Deficit in Hock in the first place has made them lazy and given over to an entitlement mentality that will probably result in revolution rather than coming to their senses and becoming productive.

J. Ewing

Anonymous said...

Is the fault all on Deficit's side? Are there any errors Surplus made here which can be learned from?

As for printing of money, I submit for your consideration the game of Monopoly. At the beginning of each game, each player is issued money they did not earn, which is used to create value. What would the game be like if no money was issued? Would any value be created during the course of the game? Or would the players just go around in circles, eventually all ending up in jail?

--Hiram

Anonymous said...

"They [Deficit] simply print up vast quantities of new currency and use that to continue their profligate ways."

This hypothetical is, of course, a riff on European Union problems. Deficit doesn't get to print up Euros; they don't control their own currency now. Neither does Surplus, but Surplus is where all the Euros from Deficit have gone.

There are printing presses in Deficit however, and while they can't print Euros, they can print their own currency. Should they? Would that help or hurt? Help and hurt?

--Hiram

John said...

I think Surplus did make a mistake in allowing the folks of Deficit to run up such a large debt. A lender does bear responsibility for not making bad loans. They should have cut off Deficit sooner, maybe then Deficit would have started addressing their excesses earlier.

Anonymous said...

"I think Surplus did make a mistake in allowing the folks of Deficit to run up such a large debt"

I do too. That is part of the problem.

"They should have cut off Deficit sooner, maybe then Deficit would have started addressing their excesses earlier."

Why didn't Surplus do that? But they didn't and so the damage is done. What should the policy be going forward?

--Hiram

Anonymous said...

"It seems to me that Surplus should be finding more affluent trading partners."

That expands the hypothetical, but that's fine, I left a lot out so that it could be expanded. The problem Surface has is that affluent trading trading powers are in short supply, and in varying degrees Surplus as the same problem with them as it does with Deficit. If the current trend continues, Surplus will wear out each of it's trading partners over time, sucking the Euros out of them, until it's in the same position with respect to them as it is with Deficit now.

--Hiram

John said...

What would be your recommendation?

Anonymous said...

What would be your recommendation?

The first step is to figure out what the problem is. And I think there are a lot more than just one problem. I just heard a guy on Morning Joe say that, in effect, the problem is low productivity in Deficit. Not high productivity in Surplus, interestingly enough.

Here are some possible solutions:

Surplus could absorb Deficit. This is what West Germany did with East Germany. It's also what Japan tried to do with Manchuria. This course is expensive, creates new problems but solves some of the old ones.

Another possibility is bankruptcy for Deficit, simply to write off the debt and start over.

But as for what the problem is, we haven't focused on Surplus. I mean they are the good guys right? Industrious, productive, advanced? But aren't they part of the problem too? Haven't they been engaging in predatory trade practices in order to prop up their own economy? Everyone knows Deficit is broke now. But hasn't Surplus known this for quite some time and still extended them credit? And is Surplus unreasonable in insisting that Deficit pay back money loaned by Surplus at time when Surplus knew Deficit was not creditworthy?

And as for recommendations, why don't all the residents of Deficit just move to Surplus?

--Hiram

John said...

I guess I did not see anything about "predatory" trade practices in the situation. I thought they are just offerring a product or service for sale, and the market was setting the price and volume sold. The people of Deficit were free to buy or not buy what Surplus had to offer.

Well, I know that the "Rich" funding the "Poor" is a common theme in your typical comments, however just forgiving the debt without changing seems like a good way to just continue the status quo and run Deficit back into debt again. Besides it is against my belief system that the wealthy "owe" the poor anything.

So it seems that the EU is on the right track when they insist that Greece, Spain and the other "Deficits" institute aggressive cuts in their social spending, public wages, etc before they are given any debt relief.

Now from your perspective, is this Surplus taking advantage of Deficit? Or is it Surplus helping to coach Deficit into better living within their means?

It is likely that many people who live in Deficit would not want to move to Surplus, even if Surplus allowed it. I mean they may have to work harder for their money, they may have to save for their retirement, they may need to invest in continually learning new skills, etc. That would be a pretty big culture change for those who are used to being cared for by the Government no matter what personal choices they made.

Anonymous said...

guess I did not see anything about "predatory" trade practices in the situation


I left a lot of things open ended. But Surplus has been loaning money to Deficit so that Deficit could buy it's goods. That's how it continued trade, despite the deficit.

"Well, I know that the "Rich" funding the "Poor" is a common theme in your typical comments"

Yes, and that's been happening here. Surplus' economy is based on maintaining surpluses. To do that they have been extending credit to Deficit, funding the poorer community. That worked for a while but the problem is that Deficit ran out of money of it's own to pay back the funding they received from Surplus. That's where we are now. By funding Deficit's trade, Surplus was subsidizing it's own industry at the expense of Deficit's.

The question isn't what Surplus, the wealthy community, owes Deficit. The question is what Deficit owes Surplus. If the rich don't owe the poor in your belief system, can the poor owe the rich? Bear in mind that Surplus' predatory trade policies weren't conducted for the benefit; the purpose was to subsidize it's own export industry, which happened at the expense of Deficit. And just between you and me, Surplus was continuing to loan money long after it had any reasonable expectation of getting paid back, so concerned were they with domestic consequences of a trade cut back. Surplus didn't get to be rich either by being fools, or by really believing the cooked books provided to them by Deficit.

--Hiram

Anonymous said...

"So it seems that the EU is on the right track when they insist that Greece, Spain and the other "Deficits" institute aggressive cuts in their social spending, public wages, etc before they are given any debt relief."

It's nice for them to insist, but why should Deficit comply. The first obligation Deficit officials have is to their own citizens. Why should they care if Surplus banks go bankrupt, or if Surplus politicians take heat. The fact is, Surplus needs Deficit as much as ever, because it still is dependent on trade for it's own prosperity. Rich people don't owe poor people. Rich people need poor people and that's true in the Surplus Deficit relationship.

"It is likely that many people who live in Deficit would not want to move to Surplus, even if Surplus allowed it."

Many already have in either a financial or physical sense. Many of Deficit's citizens have moved much of their wealth abroad through investments. They just aren't dependent on Deficit's local economy, and as wealthy individuals, are welcomed everywhere. Deficit is left with it's poorer citizens. But in many ways, they are just as unreachable to pay Deficit's debts as the rich. Because of the high cost of the Euro, and uncertainty about the government, Deficit has a thriving black market economy, one that doesn't rely on local banks, or pays much in the way of taxes. There is very little money to be had from poor to pay Deficit's debt. And Surplus is worried about the dangers of domestic instability if they should try to press their claims too hard.

Another fundamental difference. People in Surplus want to vacation in Deficit. The beaches are lovely. And since tourism is one of Deficit's principal industries, one of the few that can generate some Euros that might end up back in Surplus' bank, there is little to be gained from alienating them.

And by the way, Deficit people work very hard, and they work cheap, two reasons why for domestic political reasons Surplus is reluctant to let them into their own country. They might threaten the jobs of highly paid workers who form the political base of the parties in power.

--Hiram

Anonymous said...

One last think. The Rattner comments on Morning Joe. Rattner argued that the advantage Surplus has is the more productive workforce. There are lots of reasons why Surplus' productivity is higher. It's a maturer, more stable economy. But what I also expect is that Rattner has overlooked the extent to which Surplus is subsidizing it's trade with Deficit. If you looked at the numbers more realistically, the cost of labor in Surplus is much than the reported numbers, which means part of that productivity edge is an illusion. Surplus, in all likelihood, doesn't understand the extent to which they have cooked their own books.

--Hiram

Anonymous said...

Actually, Surplusians are more productive because they have long enjoyed the benefits of Capitalism, where excess capital is used to multiply productivity and increase total wealth. Deficitards started out with a semi-socialist government-run economic model which stifled investment and initiative, and now here we are.

J. Ewing

John said...

If they really were hard working diligent employees with a stable government and financial transparency, companies would be falling all over themselves to build plants there and take advantage of that great labor pool. Yet unemployment is out of control. Lexus and Olive Tree

Now look at China's growth, huge trade surplus and wealth. Now there is a country where the people know how to work and save.

John said...

"The question is what Deficit owes Surplus. If the rich don't owe the poor in your belief system, can the poor owe the rich?"

Of course the answer is yes. The poor accepted goods or services and made a promise to pay for them. That is pretty much the definition of owing someone.

John said...

"It's nice for them to insist, but why should Deficit comply. The first obligation Deficit officials have is to their own citizens."

The reality is that Deficit needs Surplus a whole lot more than Surplus needs Deficit... Surplus has lots of other trading partners. Unless Deficit really wants to start living like a third world society.

Therefore complying with the demands of Surplus is in the best interest of the citizens of Deficit. The nice thing about being wealthy is that you can usually walk away from problems a lot easier. The poor and indebted don't have that luxury.

Anonymous said...

"Actually, Surplusians are more productive because they have long enjoyed the benefits of Capitalism, where excess capital is used to multiply productivity and increase total wealth."

That's absolutely correct. That's one of the thing I meant by describing them as having maturer economies. Deficit is a very disorganized state, but it isn't a Socialist state, merely one that hasn't developed a highly organized industrial economy. But again, we are forming criticisms and judgments about the past. What do we do going forward?

==Hiram

Anonymous said...

The poor accepted goods or services and made a promise to pay for them. That is pretty much the definition of owing someone.

In any event, that's neither here nor there. The poor don't have the money to pay the debts. It should also be noted that they weren't the ones who negotiated credit terms with Surplus. That was done by bankers, a quite different group. My hypothetical sounds a lot like the relationship between Germany and Greece. But note Ireland's economic collapse was the direct result of the government guaranteeing it's banks, putting the people of Ireland on the hook for debts they had no part in incurring.

Anonymous said...

"If they really were hard working diligent employees with a stable government and financial transparency, companies would be falling all over themselves to build plants there and take advantage of that great labor pool.

This is a start, I think, in the right direction. Surplus' economy was export dominated. They treated trade as a zero sum game. For lots of reasons, some of them very good, they didn't work to develop industrial capacity in Deficit.

The China model is one with a centralized highly industrial economy. It's also unified politically. Shanghai has to doe what Beijing tells it to, in a way that Deficit doesn't have follow Surplus' orders. It should also be understood that the China model comes at a huge social cost. There have been times when Surplus has tried to impose it's will on it's neighbors with disastrous consequences both for Surplus and it's neighbors.

--Hiram

Anonymous said...

The reality is that Deficit needs Surplus a whole lot more than Surplus needs Deficit... Surplus has lots of other trading partners.

The problem is that it has the same problems with it's other trading partners as it does with Deficit. And many of those trading partners, seeing what's happening with Deficit, are modifying their own trading practices with Surplus. One of the things they are picking up on is that Surplus' economy is weakening, and that their bargaining position with respect to Surplus is getting stronger.

Debt is pretty easy to walk away from. Creditors don't serve a very useful function in anyone's life. But whatever happened in the past, Surplus' factories are still turning out new products it has to sell to someone, but no one has to buy. Deficit is very comfortable with a lower standard of living, and in many ways is a very pleasant place to live. Far more Surplus-ites vacation in Deficit than the reverse.

--Hiram

John said...

If it were as easy as you say for the citizens of Deficit to walk away from the feed trough and live the simple life, they probably would have done so sooner. Unfortunately they have historical pride and don't want to live like the folks of a third world country. (ie champagne tastes on a beer budget)

Ireland is a democractically elected government, the commitments made are binding on the people of the country. Supporting their banks was apparently important to them. That is until the laws and commitments are changed by said government.

As for China, Deficit will have to choose where the want to land on the continuum. Do they want a thriving economy where people are incented to work hard and take personal responsibility. Or do they want an unsustainable nanny state that they can not or choose not to afford.

The Eastern European (ie old Soviet Bloc countries) are also thriving as manufacturers, because labor costs are low and people there are willing to work for their money. Deficit has some hard choices ahead...

Anonymous said...


Ireland is a democractically elected government, the commitments made are binding on the people of the country.

Those commitments did not include guaranteeing the debts incurred by private bankers. And the problem the Irish had is that they managed to elect a government that didn't understand that.

The citizens of Deficit don't have the money to pay back the debt. And they have little to gain by doing so. As a result the politicians they elect, have largely chosen not to repeat the mistakes of the Irish electorate. This is also something that's happening with Surplus' other creditors.

Is the problem here really with Deficit? Sure, they struggle for a while, but it was never a society that held bankers in too high regard. And down the road, it can look forward to influx of Chinese tourists, and perhaps Chinese goods, which compete with Surplus.

Surplus on the other hand is seeing it's trade practices disrupted, it's debt written down, it'a assorted chickens coming home to roost. These conditions have not worked out well for Surplus in the past, the recollection of which paralyzes it's politicians with fear.

--Hiram

John said...

Of course the Irish citizens approved supporting the decisions of the banks. That if they are supported due to laws that were passed by their elected politicians. Just like our politicians over promising regarding social security and medicare... Let's hope both learned from their mistakes and change the laws appropriately to what can the country can afford.

As you say they have no money, are a small market and are causing problems... Maybe soon their benefactors will give up on them and walk away.

Here are some views, data and facts to add to the discussion.

NYT Friedman Can Greeks Become Germans
Guardian: Is Germany too Powerful for Europe
Reuters German Economy
World Affairs Journal Germans Pure?

Anonymous said...

We have carried this analogy a long way, looking for insight into what I assume are American problems. The article on Greeks becoming Germans helps me with that, because it raises the question about which one we are, and in which direction we are headed. No doubt we were and to some extent are still "Germans" in this context, but our government keeps driving our culture further and further in the direction of Greece (aka Deficit). The cure is the same in all three cases-- the allegory, the Euro, and the US. The question is, how and who can and will fix it?

J. Ewing

John said...

You keep forgetting that the government only does what the majority of Americans want it to do. We own our decision just like the folks in Ireland.

The question is how do we get more people to enjoy in hard work, saving, investing and personal responsibility, instead of their enjoying mediocrity, sloth, debt, spending and avoidance of personal responsibility?

It will be a challenge. Maybe if we could get everyone to read this book.
Life's Greatest Lessons - Hal Urban

Anonymous said...

"You keep forgetting that the government only does what the majority of Americans want it to do. We own our decision just like the folks in Ireland."


Sorry, but I'm not buying it. The majority of Americans opposed Obamacare, gun control, amnesty, explosion of the debt, etc., but what did we get? Nope, as far as I'm concerned the politicians own their mistakes, and the very best we can do is punish them after the misdeed is done. The only thing I think the voters can be blamed for is excess gullibility and for not paying attention.

J. Ewing
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John said...

So you really think Obama won because people are gullible and distracted? You have to be kidding...

Usually accepting reality is necessary before one can improve things.

Anonymous said...

Maybe soon their benefactors will give up on them and walk away.

But will they? Will Deficit become an economic Chernobyl? Somehow capitalism doesn't work that way. The fact is, Surplus is dependent on Deficit in ways that Deficit is not dependent on Surplus. Surplus needs export markets to maintain it's own prosperity, and many of it's markets are in a position not that different from Deficit's.

"The question is how do we get more people to enjoy in hard work, saving, investing and personal responsibility, instead of their enjoying mediocrity, sloth, debt, spending and avoidance of personal responsibility?"

The people of Surplus worked very hard and now the problems of Deficit threaten to plunge them into economic crisis. Maybe working hard isn't the only solution.

I am reading a book now, about Lindbergh and the run up to WW II. Lindbergh was enormously impressed by the efficiency and productivity of Germany who in his viewed, suffered in comparison with the inefficiency of the English. Turns out German efficiency wasn't enough.

--Hiram

John said...

I'd say Germany is still pretty incredible. Destroyed by 2 world wars and they still dominate Europe financially.

As for your thoughts, you must not have read the links I provided...

Anonymous said...

I'd say Germany is still pretty incredible.

So is Deficit.

--Hiram

Anonymous said...

"So you really think Obama won because people are gullible and distracted? You have to be kidding."

Then how do you explain that half of the people believed Obamacare would cover more people at lower cost? That's not just gullible, that's stupid. How do you explain the fact that Obama STILL has a 45% approval rating, despite doing everything wrong. There is no RATIONAL explanation for these facts. Even now, 45% of people don't know that Obamacare is the law of the land. That's ignorance on steroids. We not only have "low information voters" but we have "no information voters" and "MISinformation voters."

J. Ewing

Anonymous said...

Of course, dead voters voted for Obama 20:1 or better. I can't say anything about the reasons why.

Anonymous said...

Obamacare?

A bit off topic, and Surplus does have nationalized health care. Obamacare never came to the fore as an issue in 2008, in part, because it was warmed over Romneycare. As Mitt's primary opponents often argued, Mitt was the worst candidate in that field to make the case against Obama on health care issues. My own feeling on Obamacare is that it's inadequacies with regard to cost control, reflect it's politics and it's Republican origins. Obamacare is too market based, and for various reasons, the market for health care is going up, as markets often do.

--Hiram

Anonymous said...

I should have said Obamacare never came to the fore in 2012, not 2008.

==Hiram

Anonymous said...

And you should have said Obamacare is a disaster top to bottom, regardless of who came up with that monstrosity. It certainly has not nor can it ever live up to the promises that were made for it; quite the opposite. And anybody with two brain cells to rub together should have known it before the 2012 elections.

J.

Anonymous said...


And you should have said Obamacare is a disaster top to bottom, regardless of who came up with that monstrosity.

That remains to be seen. Wasn't it Nancy Pelosi who said that we won't really know what's in the bill until we implement it? Nancy is very wise.

--Hiram

jerrye92002 said...

Well, I've already lost my health insurance because Obamacare is coming. Millions of others have lost their insurance or had their hours cut back to avoid Obamacare. Insurance premiums have risen drastically, and more doctors are refusing to take Medicaid or Medicare patients, because of the Obamacare requirements. "Fully implemented" isn't a necessary condition for saying that there has been too much damage caused already.

J. Ewing