Friday, May 26, 2017

S = I + (G-T) and National Gift Certificates

Brian Romanchuk was discussing general equilibrium and the discussion wandered into the creation of money.  Joe Leote offered a comment that tied savings to the system of general accounts. His comment included the equation I support in the following comments. (The following quote is my return comment to Joe Leote.)

"@Joe Leote
"S = I + (G - T)"

I completely agree with your equation.

One method for supporting the logic behind the equation is to apply it to the accounting for a locally issued gift certificate. Ownership of a gift certificate is identical to owning money so long as we are shopping in the issuing store. We can call the gift certificate "mercantile money".

What happens if a merchant issues a gift certificate in exchange for electrical repair labor? New mercantile money has entered the economy.

The merchant had better account for the claim he just issued on the goods in his store. (A gift certificate (or mercantile money) is a claim on goods, limited to the amount of value on the certificate.) The merchant should record "investment = value of the electrical repair" and, in a second entry for double accounting, "savings = value of the gift certificate issued".

The savings value was created right out of the blue. Labor was performed and, at least for a while, was paid for by newly issued savings.

Now who owns the savings? I think the merchant owns the savings until the gift certificate is finally satisfied. However, one could also make the argument that the electrical worker owns the savings. The worker is richer because he has the ability to claim goods at any time. The worker also has savings.

So we see that both merchant and worker can claim to be richer because mercantile money was issued and electrical repairs were made.

"S = I + (G - T)" allows us to see that savings are created by people working for government and receiving National Gift Certificates in payment."

The final quoted paragraph is a little cryptic. The link between money and mercantile money prompts us to compare gift certificates (merchant issued) and National Gift Certificates (money issued by the national government). 

I think the parallels are very complelling.

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