Closed systems

It is much easier to do the math for a closed system such as the world.  The planet as such has no external deficit.  All exports and imports are contained within its regional accounts.  What with increasing globalisation and all, it may not be such a bad idea to pull up accounts for this closed system.

Here I would have two sectors, households and governments.  The private sector will have been pushed back to the household sector.  All companies are owned by a subset of households.  Similarly, all assets are held by households (except government assets).  All private financial institutions are ultimately held by households.  We could then trace the effect of new money creation on the household sector.  Wouldn’t it be the most?

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One Response to “Closed systems”

  1. Indian Investor Says:

    OK, let’s assume a one-world facing a burst credit bubble. If the increased money is the government spending on ‘useful’ public works, the effect on households is positive. Lower interest rates and increased liquidity would ensure more debt is re scheduled for households. That would help to keep aggregate demand from collapsing further. Too much of this would be bad, because too-high inflationary expectations can be bad for overall activity levels. Too less of this would be disastrous as well, because further debt deflation could trigger a deeper collapse in the real economy.
    There’s an optimum ‘window’ to operate in, and one to execute an ‘exit strategy’ in.There would be either a U-shaped recovery; or a W-shaped double-dip recession if the policy makers get it wrong.
    But the real problem seems to be that it isn’t a one world at all. Previously, massive inflows of capital, low long term interest rates, etc contributed to the US economy booming. In the crisis, the flows continued into Treasuries instead of corporate debt or equity. The recent change is that net flows have turned negative. Unless something replaces those flows, the rest of the above analysis needs to be modified suitably. What do you think?

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