Zero-Sum Intersectoral Financial Balances Zero-Sum Every dollar of government deficits has to be offset with private sector surpluses purely from an accounting

Using Intersectoral Financial Balances to aid Forecasting and Policymaking

paper by Keith Rankin

Dept. of Accounting and Finance Unitec Institute of Technology

for the 2014 Conference of the New Zealand Association of Economists

Auckland 2-4 July 2014

Intersectoral Financial BalancesZero-Sum

Every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector's financial balances...If the business sector is basically trying to reduce its financial surplus at a more rapid pace than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger, higher, more income, and ultimately feeds back into spending.

[Jan Hatzius, Goldman Sachs chief economist]

A country's private sector balance (household and business combined) equals its current account balance minus its general government balance. (The private balance plus the foreign balance plus the government balance equals 0.)

Global Financial Balances 2001-2010

-10

-8

-6

-4

-2

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

surp

lus a

s pe

rcen

t of G

DP

source: International Monetary Fund, "World Economic Outlook Database" (Sept 2011)

Private Sector Balances: World

private sector

government sector

Surplus

Deficit

-10

-8

-6

-4

-2

0

2

4

6

8

10

1984 1988 1992 1996 2000 2004 2008 2012

surp

lus a

s pe

rcen

t of G

DP

source: International Monetary Fund, "World Economic Outlook Database" (Sept 2011); plus KR estimates

Private Sector Balances 1984-2012: World

private sector

government sector

Surplus

Deficit

estimated


Japan 1984-2012

Autonomous versus Accommodating BalancesHatzius view– private sector balances, especially corporate balances,

are relatively (or have become increasingly) autonomous• changes in these central to his forecasting technique• behaviour of non-financial businesses

implication:– government balances are relatively accommodatingnon-financial-businesses this century– principal savers, increasingly (Karabarbounis/Neiman)– under increasingly frequent circumstances

– debt-minimisers (Koo), regardless of interest rates– balance-sheet recession ensues

Japan 1980-2010 – 4 Sectors

from Wilder, Rebecca (2012) "Japan’s Lopsided Financial Balances" Economonitor

USA 1960-2012 – Private Sector

from "Jan Hatzius Connects All the Dots" Pragmatic Capitalism

UK 1986-2011 – Business Sector

from "Stashing the Cash" The Economist, 17 March 2012

UK 1986-2011 – Business Sector

from "Stashing the Cash" The Economist, 17 March 2012

Types of Accommodation to Private Surpluses 1. coincidental– the autonomous plans of different sectors balance

• no accommodation process is required2. intentional– fiscal policy (eg Japan 1992-2013); 2009 fiscal stimulus3. unintended stabilisation– fiscal stabilisation: automatic tax-benefit stabilisers (Wolf)– monetary policy: diverse interest rates between countries

allows accommodation within global private sector (Koo)• household borrowing subject to financial marketing

4. induced: critical output gaps emerge– deflationary environment (or, if autonomous deficits, an

inflationary environment; eg early 1970s)

Primal politics gets in the way of fiscal necessityThe popular consensus is that austerity and fiscal consolidation is the right approach, or at least the one that sounds most responsible. In a time when households are feeling the pressure and tightening their belts, a government that seeks to spend in extravagance is sure to look out of touch. Thus to speak of growing budget deficits in the United States (and some European countries) encroaches on political suicide, even if economic survival is at stake.

[Clement Wong, of Economics Student Society of Australia,________re Richard Koo's 2012 Finch Lecture at University of Melbourne]

The problem here is that policymakers reflect humanity's primal fear of debt, and allow themselves to believe that all sectors can simultaneously run surplus balances. Further, independent economists are commonly too slow to point out this problem; possibly this is a process of "wilful blindness" or "lack of imagination" within the economics profession [re "The Queen's Question" (LSE) ].

The hard truth is that getting this deficit under control is going to require some broad sacrifice, and that sacrifice must be shared by employees of the federal government.

[Barrack Obama, cited in the New York Times, 29 November 2010]

-10

-8

-6

-4

-2

0

2

4

6

8

10

1984 1988 1992 1996 2000 2004 2008 2012

surp

lus a

s pe

rcen

t of G

DP



private sector

government sector

Surplus

Deficit

estimated


-10

-8

-6

-4

-2

0

2

4

6

8

10

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP



private sector

government sector

Surplus

Deficit

estimated

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP

source: International Monetary Fund, "World Economic Outlook Database" (Oct 2013)

Private Sector Balances: USA

foreign sectorgovernment sectorprivate sector

Surplus

Deficit

USA 1988-2012

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP

source: IMF, "World Economic Outlook Database" (Apr 2014)"

Private Sector Balances: New Zealand


Surplus

Deficit

New Zealand 1988-2013

other country financial signatures– United Kingdom– China– Germany– Spain– Sweden– Norway

I’ve long been fascinated with looking at private sector financial balances in particular. There was an economics professor at Cambridge University called Wynne Godley who passed away a couple of years ago, who basically used this type of framework to look at business cycles in the U.K. and also in the U.S. for many, many years, so we just started reading some of his material in the late 1990s, and I found it to be a pretty useful way of thinking about the world.

[Jan Hatzius, Goldman Sachs chief economist]

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP

source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)

Private Sector Balances: United Kingdom


Surplus

Deficit

United Kingdom 1988-2013

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP


Private Sector Balances: China


Surplus

Deficit

China 1988-2013

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP


Private Sector Balances: Germany


Surplus

Deficit

Germany 1988-2013

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP


Private Sector Balances: Spain


Surplus

Deficit

Spain 1988-2013

-15

-10

-5

0

5

10

15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP


Private Sector Balances: Sweden


Surplus

Deficit

Sweden 1988-2013

-20

-15

-10

-5

0

5

10

15

20

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

surp

lus a

s pe

rcen

t of G

DP


Private Sector Balances: Norway


Surplus

Deficit

Norway 1988-2013

Documents

Zero-Sum Intersectoral Financial Balances Zero-Sum Every dollar of government deficits has to be offset with private sector surpluses purely from an accounting