Let’s Talk About Sectoral Balances

I am a big fan of looking at things through the lens of the sectoral balances. For instance, I sometimes post this chart on this website which depicts the government’s balance vs the non-government.

(Click on image to enlarge)

(This is a stupid chart without a lot more context)

It’s a decent (though incomplete) depiction of the private sector’s balance versus the government’s position and it’s helpful to understand because, mainly, if you believe the private sector is too heavily indebted, then the government’s position might be insightful. For example, I would argue that the late ’90s were a period of concern because there was an equity market bubble and heavily leveraged corporations combined with a government running a surplus which created recession risk. That’s not necessarily a bad thing. After all, if there are economic booms then sometimes an inevitable bust is the result. But it’s a nice framework for understanding potential risks in the economy IF, and only IF, you add a lot more context to it.

Anyhow, some people use this chart in a misleading manner. The worst abusers of this chart are the MMT people and they constantly use it to misrepresent how the monetary system works. So let’s discuss that a bit because it confuses a lot of people. Just yesterday Stephanie Kelton posted this image on Twitter saying the government’s deficit is the non-government’s surplus:

(Click on image to enlarge)

Let’s deconstruct this a little bit because MMT’s depiction of this is mostly a fallacy of composition that tries to imply that the government must be running a deficit virtually all the time:

1) This is just an accounting identity. The government’s spending is someone else’s income. You could recreate a chart of this using any sectoral relationship. For instance, when I take out debt and spend the money that becomes someone else’s income. The Cullen Roche deficit is the non Cullen Roche surplus. It’s not helpful or insightful to run around saying that my deficit is everyone else’s surplus without a lot more context. After all, if we did this then we could run around posting silly charts like this one showing corporate debt and trying to imply that corporate debt is always good or always needs to be expanding. Sure, this might be partly true, but it’s not something we should lazily throw around.

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