How we’re paying for the deficit – and how we’ll carry on doing so

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The Guardian reports:

Europe's biggest companies are enjoying their biggest financial boost in nearly seven years and are sitting on a multibillion-pound cash pile which experts hope can help maintain economic growth next year.

Some 466 of Europe's biggest companies – the benchmark Stoxx Europe 600 index, minus its financial constituents, many of which have received distorting government bailouts – are sitting on a $691bn (£445bn) of cash, according to Bloomberg.

This represents a 16% increase on the amount of cash these companies – which include Vodafone ($14.3bn), BP ($12.8bn) and AstraZeneca ($10bn) in the UK – were sitting on at the end of 2007 as the financial crisis gained momentum.

It contrasts sharply with the increasingly indebted state of national exchequers across Europe, which faces a potentially devastating financial crisis.

This contrast is not coincidence: it is inevitable. The government will run a deficit as a matter of fact, whatever it plans, if it does not change three things because of the following accounting identity, which must hold true:

Budget deficit = Private Savings minus Private Investment plus Current Account Deficit

Private savings include those of households and corporations. As the Office for Budget Responsibility has noted, the UK household savings ratio has jumped from under 2% to 8% and looks to stay there – and even if much of this is paying off mortgages early it still counts as saving for economic purposes.

Here now is hard evidence that European companies are saving like fury, for all he reasons I’ve noted on this blog and which critics like to attack me for. And we know, in the UK at least, the prospect of an improvement in our trade balance is  minimal – even the OBR are cautious on that.

The outcome is, inevitably, that the deficit will remain. It is an inevitability.

Unless the government begins to spend to give reason for business and households to invest and business, in particular, to spend its spectacular pile of cash (and takeovers don’t count, by the way) then we are bound to have continuing deficits. And those savings by companies are what are paying for it (well, them and quantitative easing).

The only solution  is Keynesian. Some day soon the world will realise.