How individuals in responsible positions or authority, in local and national government, are managing our affairs on our behalf and for us, is of crucial importance to every citizen.
Government has to make ends meet, has to bring about a rising standard of secure living, social security and an increasing quality of life for its citizens. There can be ups and downs but, says Manfred Davidmann, "failure to make ends meet is just as directly and surely the result of bad leadership and management as it is in any commercial enterprise."
Balancing Income and Expenditure
We all have to balance what we are spending against what we are earning. If we consistently overspend then we either have to earn more or else reduce our spending.
Until we make the necessary adjustments, we can increase our spending money by drawing on savings, by selling jewellery, by short-term borrowing from the bank or friends and perhaps by long-term borrowing such as taking out a mortgage.
For a little while our friends or the bank manager will help us by lending money but the loan has to be repaid and we may have to pay interest. The same applies to a mortgage. The interest we have to pay makes our position worse. As a result of having to pay interest we now have less to spend and overspend more heavily.
If we consistently overspend and cannot increase our income then we are forced to reduce our spending and thus are forced to reduce our standard of living.
Hence we aim to increase our income until it more than balances what we are spending and in this way we aim to increase our standard of living.
- The same considerations apply to countries, as illustrated by Figure 2 'Making Ends Meet' in
- Inflation, Balance of Payments and Currency Exchange Rates
- which illustrates what is being said here.
For a full statement and discussion of the alternative ways of balancing national accounts, in meaningful language and with clear diagrams and illustrations, see this report. It is about National Accounts and the national Balance of Payments, in effect about good national financial management, and was first published in 1981. Its analysis and methodology are now widely accepted, world-wide, and can be of enormous help when considering the causes and effects of the US financial crisis.
Take the case where the total cost of a country's imports is more than the value of its exports. This means that more is being spent on imports than is being earned from exports. We see a payments deficit which needs to be made good as imports have to be paid for. We can:
- Increase the value of exports or reduce the value of imports, or do both.
- Increase short-term borrowing by increasing the interest paid by us to depositors.
If the country is failing to make ends meet, then short-term borrowing is a convenient way of raising the required funds for paying one's debts but interest rates increase accordingly.
This quickly affects the level of share prices, which fall. The house of cards consisting of fictitious (unreal) share values then faces collapse. Hence government is under pressure to keep interest rates low.
Share prices also depend on other factors, but share values may increase steeply, and may be kept up artificially, by reducing interest rates and by keeping interest rates low.
As interest rates were reduced and as share values increased, corporations (companies) have withdrawn corresponding 'surpluses' from their company pension funds and added them, or a substantial part of them, to shareholders' profits.
As share prices fall, pension funds can become underfunded. Companies may then be obliged to make up the underfunding to some extent. It appears that the likelihood of this happening may be an important factor.
And governments are not informing their populations of the enormous costs of importing sources of energy, are apparently trying hard to keep interest rates level or low, are attempting to balance national accounts by means other than short-term borrowing.
Means corresponding, for example, to selling the family silver or taking out a mortgage, like selling ownership or majority control of one's major productive and service assets into foreign control.
- Increase long-term borrowing (for many years) against terms which depend to some extent on our credit worthiness. Interest charges have to be paid regularly and the loan repaid in due course.
Britain, for example, had to borrow vast sums annually so as to pay for imported oil until North Sea oil became available. Combined with a considerable increase in borrowing requirements by local government, this materially contributed to the annual deficit. It soon became apparent that it is not easy to reduce one's standard of living, and different sections of the population were confronting each other, struggling to maintain their own level, their own standard of living, struggling for a bigger share of what was available.
Many underdeveloped countries find themselves working to an increasing extent for those who lent them money in the past, or for those who provided essential goods such as oil at high prices, working very hard to export more and more merely to pay interest and repay loans granted in the past instead of bettering their economic capability and the standard of living of the people.
- Sell some of our stock of gold to obtain foreign currency.
- Sell assets such as land, hotels, factories and business interests to foreign buyers.
- There are considerable dangers inherent in allowing such investments to take place on any scale, in allowing control of important assets to pass into foreign hands.
In practice any combination of these may be used, dependent on the circumstances the country finds itself in and on its credit worthiness. Each one affects the country's progress and prospects differently, particularly as regards inflation.
- See report
- Inflation, Balance of Payments and Currency Exchange Rates.
|Inflation, Balance of Payments and Currency Exchange Rates
|Describes, reviews and illustrates the underlying relationships. How inflation affects currency exchange rates and trade. How interest rates determine share prices and pensions, and thus also the extent to which pension funds are in surplus or underfunded. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality. Clear diagrams and worked examples.
See 'Press Notices'.
Manfred Davidmann is an internationally well-known and respected scientist and author of a number of books and reports which have had and are having considerable impact. His work usually breaks new ground and opens up new understanding and is written in meaningful and easily understood language. Outstanding is that his work is generally accepted as factual, objective and unbiased.
The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.
To see the Site Overview page, click Overview
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