How to Think About the Deficit, the National Debt, and Interest Rates

According to the Fed’s most recent Z.1 Financial report for Third Quarter 2023, on 12/31/2022 U.S. balance sheets were contained $322 trillion in financial assets and $143 trillion in tangible assets . That makes total assets $452 trillion , about 18x the value of 2022’s $25 trillion GDP.

I ended up with a picture in my head of a market economy as a far-from-equilibrium communications network that uses prices to transmit information about wants and scarcities to people who make production and consumption decisions, exactly as Friedrich von Hayek [4] explained almost 90 years ago. That picture views economic activity is work produced

I ended up with a picture in my head of a market economy as a far-from-equilibrium communications network that uses prices to transmit information about wants and scarcities to people who make production and consumption decisions, exactly as Friedrich von Hayek4 explained almost 90 years ago.

The two rows at the bottom of Figure 2 tell us that the demand for asset i, say government debt, at given interest rates, will increase in direct proportional to increases in net worth. We will make use of that fact below.

In my Far from Equilibrium Economics and Finance course, the first two articles I have my PhD students read are Friedrich von Hayek’s Economics and Knowledge (1937) and The Use of Knowledge in Society (1945) , von Hayek’s classic papers that describe a market economy as a solution to the division of knowledge problem. The third article I have them

It makes sense that the stock of total assets is such a big pile of stuff. You can think of it as the value of all existing raw materials, like land, oil, and timber, plus everything people have produced since the beginning of time that is still here (that hasn’t been consumed or worn out yet), plus all existing paper assets like bank accounts, Tre

The Balance Sheet Economy is static; it measures what we own , not what we are doing*.* Its metrics are expressed as stocks of assets that exist at a moment in time. For example, on December 31, 2022 there were 142 million existing homes in the U.S.

The flow economy is dynamic; you can think of GDP accounts as the economy’s Profit and Loss (P&L) statement. It measures what we are doing, using metrics expressed in dollars per year like consumption, savings, investment, government spending, taxes, net exports, and GDP. Things expressed per unit of time measure speed, like miles per hour on y

Two Economies, Not One

As I have written in previous posts, the are two economies, not one. One is the Flow Economy that produces goods and services. The other is the Balance Sheet Economy that stores wealth