Sectoral Balances

Buried amongst the tons of useless paper issued by the Fed is the occasional gem. It is an analysis of the national balance sheet, something which is seldom considered in the search for the illusion of “growth.” Of particular interest is the sectoral balance. You can look at this as borrowing vs. saving by sector, or as profit and loss by sector – either way, it is the excess or deficit of spending over income.

(billions) 2007 2011
Households & nonprofits -126 476
Nonfinancial noncorporate businesses -74 -6
Nonfinancial corporate businesses -94 422
Financial business -3 125
Federal government -315 -1357
State & local governments -93 -113
Rest of the world 716 484

– indicates net borrowing

+ indicates net lending

One can clearly see what is happening in the economy. The household sector is (perforce) deleveraging – spending is less than income. The federal government has decided to run a massive deficit – about half of the increase in which is funding the household deleveraging effort and the other half is funding a dramatic increase in corporate profits.

A steady constant, of course, is the external deficit which shows up here as net lending from the rest of the world – the dollars expended to pay for trade items must return to the US one way or another, so they do. It is the steady accumulation, year in year out, of this deficit which is the big problem because it builds high levels of external debt. This is why the PIIGS  (and the US) are in big trouble, yet Japan is limping along. Japan has been running a trade surplus until very recently, so has been able to cover its borrowing domestically. Starting a dispute with China has caused it lose its surplus as exports to China have slowed.

The bottom line, however, is that there is no free lunch. It doesn’t matter if the government issues bonds or simply prints paper money (MMT idiots) – it is the simple excess of spending over income that matters. And that is going to as much to fund corporate profits as anything else. In case you were wondering why stocks were so high in the early stages of a recession. Whatever else happens with the “fiscal cliff” we can be sure that the deficit won’t be reduced because that would hurt profits.

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