Sovereign Governments Cannot Go Broke in Their Own Currency

The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.

Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.

When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.

If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.

Why Do People Believe That Saving Equals Investment

The latest endless debate among mainstream economists is on Saving equal Investment (S=I). This equation is so controversial right now, it's already comedic. Anyway, why do we have this equation anyway, S=I? 

Savings in an economy can comprise of actual investments, and unspent income. Any unspent income does not contribute towards the GDP, so it can't be part of C+I+G+X-M. Any unspent income will actually lead to lower GDP in the next time period.

If I means income spent on capital investment, and savings includes unspent income, why will S=I? Savings a.k.a unspent income doesn't lead to more capital investment because, even if deposited in banks, it doesn't lead to more lending for investment. After all, banks don't need deposits prior to lending. It's lending that creates deposits. Also, savers don't normally save to put to investments later on. Many just want to have a cash buffer for consumption, if they foresee not having enough coming from income in the coming time periods.

So why keep S=I? Investment may include inventory, which may have remained unsold by businesses during the current time period. But unsold inventory usually isn't a result of businesses wanting to spend more of their income on more unsold inventory. They're usually a consequence of buyers deciding not to buy. So an increase in household savings does not necessarily mean an increase in business savings. It may actually mean a decrease in savings by businesses because businesses may now have to liquidate those unsold inventory at a huge loss, and not necessarily by selling to households at discounted prices. i.e., increased savings for households. Some unsold inventory may simply go to waste, the scrap heap, meaning, decreased savings for business (they'd used previous income to purchase the inventory) and decreased business income for the current time period. 

So why keep S=I? It assumes the economy is in equilibrium, where all savings goes towards investment, which it never is and never does. Nowadays, I can constitute not just of S, but increasingly, of B (Borrowing). This B doesn't come from S because again, banks don't need deposits prior to lending. It's lending that creates deposits. 

Any unspent income, not put into actual capital investment, for all intents and purposes, has now exited the economy (unless it's used to pay off their B, which doesn't really contribute to GDP, but can be considered as decreasing banks' I).

Seeking Debt For Development

I do not know whether to laugh or to cry when came across the following article published in Brunei Times yesterday.

http://www.bt.com.bn/business-national/2012/01/19/sukuk-can-help-fund-sultanates-infrastructure-projects-scholar

By now I believe most readers are fully aware that Brunei have the ability to create unlimited amount of Brunei dollars. Brunei is not revenue constrained in her ability to spend on infrastructure projects. In fact most countries in this world (except for 17 countries in the EU) can create unlimited amount of their sovereign money and spent it on their country developments.

Yet, most people ignore this fact and continue in believing that a sovereign country needs to raise adequate capital first before it can spend. Such outdated thinking continue being permeated by so called economic experts. What a waste!

Issuing bonds or sukuks are relic of gold standard - creation of money backed with gold. The world had been off the gold standard since August 1971.

Jobs - Does it matter?

I came across a story ran by a UK newspaper, The Telegraph about the future of jobs. According to the article, the Japanese government is looking to introduce robot in agriculture. Full story can be read on the following - http://www.telegraph.co.uk/technology/news/8996505/Japan-to-open-robot-farm-in-tsunami-disaster-zone.html

It make me wonder if we are inching any closer to a jobless society. Last year I wrote a similar story as a personal musing - http://brunei2035.blogspot.com/2011/09/personal-musing-do-jobs-matter.html. I guess soon enough we shall knew the answer.

Text Books Dilema

Last year I suggested that our government should look into the idea of giving iPad to every students in the country, see - http://brunei2035.blogspot.com/2011/09/ipad-for-all-brunei-students.html

Now it seems that the justification for such an idea is more relevant and pressing than ever before. Year after year, the issue of text books shortage is always the same. This year the vendors' tried to justified themselves for the shortages. But to me, what ever the excuses are, a failure is still a failure.

http://www.bt.com.bn/news-national/2012/01/12/vendors-reasons-book-shortage

By giving an iPad to every students, the issue of non availability of text books can be easily overcome. Parents, students, teacher can always download the required materials. By having an e-text books, amendments can be easily incorporated., thus reducing unnecessary wastage as mentioned by the vendors. It also helps to reduce our students load and moreover give the students an awareness in conservation. Imagine all the trees that can be saved by adopting an e-text book.

In any case, if you think that an iPad seems to be excessive maybe we could buy from India a US$35 tablet computer.

http://www.sott.net/articles/show/212653-India-develops-35-dollar-tablet-computer-for-schools

With a total student population of 111,920 (BDKI 2011), total government spending on the Indian tablet shall comes to US$3,917,200 or B$4.5 million. Can the country afford it? YES!!!. Our country is not revenue constraint. We can create the required fund because Brunei is monetarily sovereign nation.

Government Spending

I wrote last year about the need of our government to spend on renewable energy. Today I saw in the Brunei Times newspaper an Aussie expert calling for the government to subsidize solar power in the sultanate. Interesting isn't it?

http://www.bt.com.bn/news-national/2012/01/10/aussie-expert-pushes-solar-power-subsidies

I wonder if the official in charge will heed to this expert's calling. Sincerely, we do not need some foreigners to tell us what to do. We have the knowledge, know-how and capability to put on our thinking cap. Alas, we believe more on consultants than our own initiatives.

Anyway, I honestly hope that we took the advice on board as we a monetarily sovereign nation has the mean, capacity, and resources to create our own money and invest into renewable energy initiatives. We do not need to wait for FDI nor oil and gas money. Brunei dollar is still good enough!

Update

I have thought very hard of leaving this blog. But I found very hard to do it. Thus, I shall continue to update blog while at the same time continue updating my malay blog. Hope to see you again soon.

Moving Out

Dear All,

I am leaving this blog. I am moving to my new blog -

http://anakbrunei2035.blogspot.com/

The new blog will be in malay language. Hope to see you there.

Brunei CPI

Today I managed to read a report published by the Department of Economic Planning and Development (DEPD) on our country consumer price index (CPI) - http://www.depd.gov.bn/cpi/2011/CPI_112011.pdf. It stated that up to the month of November 2011, our country's CPI had increased by 2 percent. One area that I particularly interested the most is the Food and Non-alcoholic beverages (F&NB).

According to the report, CPI for F&NB had increased to 1.5 percent. To some people that increment might sound insignificant. However, if we look the figures since 2005, F&NB had increased by 14.1 percent!!. That's right folks, our food had increased quite significantly. Is there anything we can do about it?

Well, not much really. According to FAO, world food prices shall remain high for awhile even though the food index dipped to 231.1 points in August (In 2009, the food index was below 130 points). Further reading can be found on the following - http://www.bt.com.bn/business-world/2011/09/09/food-prices-remain-high-says-fao

So folks, it's look like that nasi katok will be on the menu for awhile. On the same token, I am wondering if those nasi katok sellers can maintain their B$1 price....hmmmm...

Happy New Year 2012

To all my readers, I wish you a happy new year 2012. Hopefully that people are more sensible in their macroeconomic thinking in the 2012. Best of luck to all. Cheers!