The Economy is Like a Balance Sheet

The Economy is Like a Balance Sheet
by Alex Merced

Everyone Company and Person has a balance sheet. The balance sheet is made up of two sides:

One side has all the assets which is all the stuff the entity has ownership (control of) this can be cash, goods, intangiables, etc. More assets is better than less assets but in order to attain all those assets no one generally pays upfront, they more than likely borrowed money on the way.

The Liabilities portion of the other side represents all the borrowing I've done on the way to attain all these assets, and these assets will later on have to be used to pay these liabilities. Liabilities are not flexible, if I borrow 1000 dollars I must pay back 1000 dollars. So since liabilities are not flexible having large liabilities make the company less flexible during decreases in the amount or value of their assets.

After using my assets to pay off all these liabilities the remaining quanity is my Equity (true ownership), this quanity is flexible so more equity is desireable. A company that is almost all equity is Apple and they have proven to be a company constantly innovating in bad and good economies due to their capital structure aka balance sheet.

So more equity is desireable and less liabilities as well... so how does this relate to the economy as a whole. The Assets/ Resources in the Economy is like the assets side of the balance sheet, a bigger economy is more desireable than a smaller economy but what is the makeup of that economy can differ.

The Public Sector is like liabilities, rigid and not very flexible. Wages in the public sector only go up and never go down, instead of adjusting expenses the public sector will tax more to make up short fall. So this portion of our economy lacks the resiliency to withstand reduction of assets in the economy, so the larger this portion of the economy the more difficult the down turn.

The Private Sector is like Equity, it's flexible, entrepneurs can adjust their costs, wages, and everything in order to survive a downturn in the economy without having to waste more resources, the private sector can adjust to shifting assets/resources in the economy.

Conclusions:

- To have a resilient economy a larger private sector is desireable which means a smaller public sector, since both sectors are competing over the same resources in the economy.

- When there is a downturn the Public Sector doesn't adjust so it must grab more resources elsewhere, which it will from the private sector which will shrink the private sector which is similar to the effect of a drop in equity when assets depreciate.

Here: Another Great Article Referring to Balance Sheets