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

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Presentation on theme: "Zero-Sum Intersectoral Financial Balances Zero-Sum Every dollar of government deficits has to be offset with private sector surpluses purely from an accounting."— Presentation transcript:

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2 Zero-Sum Intersectoral Financial Balances Zero-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.)

3 Global Financial Balances

4 Global Financial Balances

5 Japan

6 Autonomous versus Accommodating Balances Hatzius view – private sector balances, especially corporate balances, are relatively (or have become increasingly) autonomous changes in these central to his forecasting technique changes in these central to his forecasting technique behaviour of non-financial businesses behaviour of non-financial businessesimplication: – government balances are relatively accommodating non-financial-businesses this century – principal savers, increasingly (Karabarbounis/Neiman) – under increasingly frequent circumstances – debt-minimisers (Koo), regardless of interest rates – balance-sheet recession ensues

7 Japan – 4 Sectors from Wilder, Rebecca (2012) "Japan’s Lopsided Financial Balances" Economonitor

8 USA – Private Sector from "Jan Hatzius Connects All the Dots" Pragmatic Capitalism

9 UK – Business Sector from "Stashing the Cash" The Economist, 17 March 2012

10 UK – Business Sector from "Stashing the Cash" The Economist, 17 March 2012

11 Types of Accommodation to Private Surpluses 1. coincidental – the autonomous plans of different sectors balance no accommodation process is required no accommodation process is required 2. intentional – fiscal policy (eg Japan ); 2009 fiscal stimulus 3. 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 household borrowing subject to financial marketing 4. induced: critical output gaps emerge – deflationary environment (or, if autonomous deficits, an inflationary environment; eg early 1970s)

12 Primal politics gets in the way of fiscal necessity The 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]

13 Global Financial Balances

14 USA

15 New Zealand

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

17 United Kingdom

18 China

19 Germany

20 Spain

21 Sweden

22 Norway


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