(P&I) The Process – The Balanced Budget

Do you have enough? Yes. But what about the rest of us?

Essay. It’s undoubtedly controversial and contentious when we assert that the “balanced budget” is, or develops into, an “exchange economy” at the “death embrace”, Company D, with modality α=1/e.

There are lots of people who don’t want to hear that because the “exchange economy” which they advocate on high principle, but fused with a hypocritical Puritan, or similar, hirsute ethic, favours those who “have” over those who don’t, but the only time that an exchange economy might be acceptable is when everybody has enough. He did say, however, several times, that “the poor will always be with us (Matthew 26:11)”.

The most common example that advocates of the balanced budget use is the example that is most common to us all  – the household – and we all know that if our expenditures consistently exceed our income, there will come a time when we can’t borrow any more money to finance our lifestyle – no one will lend it to us because there’s demonstrably no chance that it will be re-paid.

Home Sweet Home

But a typical household might “own” a home for which it paid $400,000 with a $100,000 down payment and a mortgage of $300,000; and a car for which it paid $30,000 with a $10,000 down payment and a “car loan” of $20,000; and there may be credit card debt, which is basically a revolving line of credit and could be likened to “working capital”, such as it “works”.

Ignoring the “credit card” debt, for the moment, the total liabilities of the household are $320,000, which is “what it owes” (P). What is owed to it, (R), in an economic sense but not necessarily in a legal sense, are its total assets plus its “accumulated depreciation” less what it “owns”, and the difference between its total assets and its liabilities are its “net worth”, which could be negative.

Its “total assets” are its house and its car plus the “accumulated depreciation” on both of those, which is the “down payment”, $110,000 in total ($100,000 for the house and $10,000 for the car); and what it “owns” are the “net worth” of both of those, $320,000 ($300,000 for the house and $20,000 for the car, as measured by the “loans” on them, which they “secure”), so that what is “owed to it”, (R), is its “total assets” of $320,000 (house $300,000 and car $20,000) plus $110,000 for the “accumulated depreciation” less “what it owns” $320,000 (which are its house and car) and the “modality” of this household is α = R/P = ($320,000 + $110,000 – $320,000)/$320,000 = 0.344 < 1/e = 0.368.

It can be argued that the house and the car are “worth” more than the debt on them, but that’s an “investment” argument that can’t be proved until those items are sold for cash, or we receive an offer for them, in which case they are “receivables” which might exceed the debt on them (which needs to be paid before they can be sold).

Hence, we can expect that the prudent household, and the poster-child for “prudence”, owes nearly three times what is owed to it, and the “working capital” account (its credit card debt) is indicative of how well it runs on a “balanced budget” and, obviously, these numbers reflect the “demonstrated societal norms of risk aversion and bargaining practice” with which we are all familiar; please see “The Theory of the Firm” for how this works in general.

It could also be argued that paying down the debt will raise the modality, which is true, but that argument also assumes that the “total assets” will retain their values, and even appreciate, which depends on how well they are maintained, and that’s a vital component of “government work” which needs to maintain the assets – infrastructure, buildings, schools, health care and other services, pensions, employment, and so forth – while spending less money on them without raising taxes to “balance the budget”.

We call the Company D modality, α=1/e, the “death embrace” because it can exist indefinitely (for an eternity, so to speak), and everyone in it can be more or less “comfortable” depending on how well the economy meets the needs of its residents in an economy in which “receivables” are routinely exchanged for “payables” and there is always some “profit” in every exchange; for more on “profit”, please see our Post “(P&I) The Process – End Of Process (E, C, D)“.

A Call To Arms

And, secondly, there’s no way out of it without an increase (or decrease) to both the payables and the receivables which is usually achieved “out-of-process” by “finding” some new source of payables (or receivables) as might be “found” in cases of national emergency such as in a disaster or a declaration of war, or by more refined economic and fiscal policies such as a currency devaluation, hyperinflation, or a default, in the event that their “working capital” is not sufficient to maintain their “lifestyle”.

For more details, please see our Posts “(P&I) The Process – The 1st Real Dollar” which shows how a “currency” gets its value from the “subsistence economy” at the Company D modality, and “(P&I) The Process – The Guns of August” which explains how that modality actually “works”.

For more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary; we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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Disclaimer

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