Some of you may have noticed that I tend to harp on aggregate demand as the key to understanding our macro economy. AD is a simple way of looking at a complex system that also has the benefit of producing a number that represents GDP or the sum total of all economic activities measured in wages and income. For the benefit of Mr. Kite, here it is yet again. AD=Personal Spending+Business investment+government spending+net proceeds from foreign sources(exports less imports). All the money in circulation within an economy can be viewed by this simple equation for the purposes of analyzing policy options. Of course this equation is not perfect, it really does not represent "all" the money and it is made up of very complicated variables which only a statistician could ever hope to verify but for the purposes of looking at an economy from 20,000 feet, this is a great tool. Let us say that the sum total of one years activity (AD) is equal to the GDP. Let us also say that this number is 10 trillion to make numbers easy to grasp. Personal consumption runs around 75% or 7,5 trillion. That number represents us spending all our money on things, it does not represent savings or debt retirement. Business investment may be another 5% or 500 billion. This number comes from balance sheets, VC funding sources, bank loans, bonds and so forth. Government spending is easy to grasp, around 22% of GDP or 2.2 trillion. We are now up to 7.5t + 500B + 2.2T or 10.2 Trillion. That is more than the sum of the four elements! This is where the fourth variable comes into play. We run a trade deficit every year. That means what we import is more than we export. When we run a trade deficit, this variable is a negative number. Let us make up a number that says the net proceeds is minus 200 billion. Now we have a balanced AD equation. If the people running our nation could only agree that this analysis was a good way to look at the economy, we would be in great shape to actually formulate policy using something objective. So let us agree that this little equation is valid, the numbers seem right and then let us play with some possible options to get 10 trillion bigger. Option 1: Make personal consumption bigger. How do you get people to spend more money without making something else in the equation smaller in the process? Tax cuts would give people more money but then government tax receipts will take a hit forcing them to borrow money to pay for their spending. You could do tax cuts and cut spending but if you cut taxes by 1 dollar, somehow personal spending would have to increase by more than one dollar to make AD bigger. How much bigger? Take a guess because that is what the economists do and your guess is as good as mine. You could make consumption bigger by rising wages, incomes and getting people back to work. But where does all that new money come from to pay these workers? Somebody else in this equation has to pony up the dough or money just has to appear from thin air. Where could this new money come from? Possible sources are debt, asset depletion, exports, foreign capital, business investments or increased exports. Of course you could also just allow the government to make more money as well, its called deficit spending or printing money. Option 1 is the battleground for economic policy debates. What if you could create a model that perfectly simulated each option considered and gave you a new AD number? You would be a friggin genius and win the Nobel for it. No one has this perfect model. So every decision made in this part of the equation is very difficult to review objectively. Since this part of the variable is so large, we cannot ignore it so all of us pick some policy using our best guesses or biases and then run with it. Depending upon your politics, you will choose different paths. No one knows which is right for tomorrow but we sure as hell know what happened in the past when we did one or the other. Option 2: Make business investment bigger. This seems like a no brainer but what would compel any business to make investments and use assets or credit to expand? Well, businesses need customers and customers need money to buy the stuff businesses sell so unless businesses see a market, they will not invest. What is good for one sector's growth may actually replace another sectors business leaving the total AD the same. This is what happens when incomes are flat. The same amount of money is spent but it is spent in different ways. Fine for a company but it doesn't do shit for the overall economy. So the key to getting business to invest is for them to see more money going to people, more business coming from the government or more sales internationally. Trade agreements supposedly fix the export side but all trade agreements seem to be asymmetric. They usually result in more imports to the USA than we gain in exports. So, the net proceeds are always negative in a free trade economy. Option 3: Make government spend more money. This is what we have been doing for decades now. By borrowing a shitload of money every year, we add money to this equation helping to make the sum stay at 10 trillion. If we stopped borrowing money and forced the government to balance the books, the 10 trillion number would drop by about 5% at least. Not good. Option 4: Increase exports, decrease imports and create a trade surplus. Since we are the customer to the world, if we did this we would in essence put the world economy at risk or become an isolationist economy. Our spending is someone else's income and vice versa. Very complicated stuff, very political and this is how wars start. So now we are stuck. We argue about how to affect AD along party lines and never seem to agree on how to look at these questions objectively. But is there another way to increase AD? Sure. Wealth represents the stored value of unused assets. Much like a corporate raider who sees an undervalued balance sheet, we have trillions of dollars in wealth sitting around all over the place that could be unleashed if only we could get at it. How? Perhaps a wealth tax or a massive inheritance tax or a global war on tax shelters and havens. I am not sure which is the way forward but this is definitely one way of finding more money without printing it out of thin air. The Romans used to do this when a regime changed. They did this because money was tied to gold or silver. Today, money is fiat based but it still has limits because all the central banks are worried most about inflation. So printing more money seems to be off the table at least as far as printing enough money to make AD bigger in a meaningful way. We currently make money out of thin air in small doses compared to AD. What to do? Hell I don't know. But I am curious to see if you folks think this type of reasoning is a valid way of looking at the problem. Remember though that economics may appear to be a science but it is not really a hard science. It is more like psychology or quantum mechanics in that the progress made by some only creates more questions than it usually answers.