How to repair a bankrupt country

How to repair a bankrupt country
By Alex Merced

Well continuing with the balance sheet analogy of my previous post, how does a bankrupt company survive bankruptcy and what is bankruptcy. In order for a company to survive it must have enough assets to pay of it's creditors which are part of it's liabilities, if it can't do this (which means there's no more equity) then the company must go into bankruptcy. In bankruptcy the company will attempt to do a few things:

1. Try to restructure the terms of it's liabilities
2. Try to exchange liabilities in exchange for Equity
3. If possible to see if people will forgive debt (wouldn't bet on this)

So basically for a country as the economy shrinks to the point where there is little to no private sector and just a public sector this is an economy in bankruptcy. So how would we use the bankruptcy approaches above to fix this problem?

1. Restructure the costs of the Public Sector by lower wages, laying off excess public workers, and lowering the amount budgeted to parts of the private sector.
2. Turn some public programs into privately run services or programs which allow entrepreneurs to find ways to provide the same service in a profitable and cost efficient way, without the moral hazard that running at a perpetual loss a public program can cause.
3. Or completely end programs and services who's costs can't be reduced and can't be privatized.

All three of these actions will result in more resources for a larger private sector means for a resilient and vibrant economy as I described in the previous post. In a country like the US that is quickly growing into this bankruptcy scenario it's time to start advocating drastic measures like this before it's too late.

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