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Peter Dorman:

EconoSpeak: This Is What Accounting Identities Look Like: I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities... “serious” people somehow think that public and private debt levels can be lowered simultaneously, without... a current account surplus.... It does not occur to them that one person’s debt is another’s asset.... [I]f the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen.

That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.

Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to... a downward spiral of pointless misery.