France: Stock Market Trade Opportunity From Annual Fiscal Flows

The purpose of this article is to assess the macro-fiscal flows for France and determine what effect these flows will have on the stock market and the economy.

Macro fiscal flows impact investment markets with a lagged effect of typically one month. A flow of funds now from government spending or bank credit creation will lead to a boost in investment markets one month later.

To understand the fiscal flows, one has to look at the balance of sectoral flows within the French economy using stock flow-consistent sectoral flow analysis.

Professor Wynne Godley first comprehended the strategic importance of the accounting identity, which says that measured at current prices, the government's budget balance, less the current account balance, by definition is equal to the private sector balance.

GDP = Federal Spending [G] + Non-Federal spending [P] + Net Exports [X].

As a percentage of GDP, all three sectors sum to zero and balance each other out.

The chart below shows the national budget information to January 2019.

France gov budget to jan 2019

France is not sovereign in the currency that it uses; it has no legal right to put more Euros into circulation if it so chose. France uses the currency of the European Union [EU] and borrows Euros at interest from the European Central Bank [ECB]. In effect, France operates on a fixed exchange rate system similar to a gold standard.

In the case of France, and the other EU members, a federal government deficit means that the government is in effect indebting itself to a foreign power and if it were to have trouble paying its national debt it could find itself treated like Greece and Cyprus were in the last sovereign debt crisis following the GFC boom-bust.

Today’s neoliberal Washington Consensus reverses classical liberalism by favoring predatory rent extraction, regressive tax policy and deregulation. “Reform” now means undoing what in the 20th century was considered to be reform. Anti-labor policies to reduce union power and workplace protection are labeled reform, as is the rewriting of bankruptcy laws reversing the long trend of more humanitarian treatment of debtors. Nowhere is the Doublethink vocabulary more blatant than in the financial conquest of Greece by the Eurozone “troika” – the European Central Bank, European Commission and IMF. James Galbraith, an advisor to Greek finance minister Yanis Varoufakis, was asked whether “the institutions (the IMF, the EC and the ECB) will have to rescue Greece indefinitely.” He answered: There is no “rescue” going on here. There is no “rescue,” there is no “bailout,” there is no “reform” going on. I really need to insist on this, because these words creep into our discourse. They are placed there by the creditors in order for unwary people to use them, but there is nothing of the kind taking place. What is going on is a seizure of the assets owned by the Greek state, by Greek businesses and by Greek households. There is no sense that this has anything to do with the recovery of the Greek economy or with the welfare of the Greek people. On the contrary, the policy is utterly indifferent to those considerations. -(Source: Hudson, Michael. J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception. ISLET/Verlag. Kindle Edition.)

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Bill Johnson 1 year ago Member's comment

Unfortunately, France is going down the tubes. Yellow jackets are tearing up the place, the economy is collapsing, and nobody wants to work because of all the free handouts. The few that do have no incentive to do well since it's impossible to get fired. I have nothing against the French (heck, my sister married a French guy). This is just the way it is over there.

Alexis Renault 1 year ago Member's comment

I undetstand that since France uses the Euro as its currency instead of its own sovereign currency, it can't simply print up more money to solve its debt problem. But wouldn't that just cause a whole different problem of inflation? Think Germany after World War I.

Alan Longbon 1 year ago Author's comment

On Limits to National Government Spending

1. An inflation rate that cannot be controlled by an interest rate.

2. The amount of real resources in an economy that one can buy in the unit of account.

Any sort of currency creation and spending can be inflationary whether it is commercial bank created money or national government created money. National government spending is no more inflationary than credit money, however, the later is celebrated and the former bemoaned.

National government spending on productive public assets that advance the public purpose such as healthcare, education, and infrastructure are inherently deflationary in that they lower the cost of business and living but in a good way that allows income to be spent on more real goods and services.

Alexis Renault 1 year ago Member's comment

Thank you for the very thorough answer!

Dan Jackson 1 year ago Member's comment

"Macro fiscal flows impact investment markets with a lagged effect of typically one month. A flow of funds now from government spending or bank credit creation will lead to a boost in investment markets one month later." Interesting, I haven't heard that this could be tracked with such precision. Is it truly so accurate? Where did you get this delay duration from?

Alan Longbon 1 year ago Author's comment

From the research of Robert P Balan.