Transcript slides - Keith Rankin

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 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.)
Global Financial Balances 2001-2010
Private Sector Balances: World
10
Surplus
private sector
8
government sector
surplus as percent of GDP
6
4
2
0
-2
-4
-6
-8
Deficit
-10
2001
2002
2003
2004
2005
2006
2007
2008
2009
source: International Monetary Fund, "World Economic Outlook Database" (Sept 2011)
2010
Global Financial Balances 1984-2012
Private Sector Balances 1984-2012: World
10
Surplus
private sector
8
government sector
surplus as percent of GDP
6
4
2
0
-2
-4
-6
estimated
-8
Deficit
-10
1984
1988
1992
1996
2000
2004
2008
source: International Monetary Fund, "World Economic Outlook Database" (Sept 2011); plus KR estimates
2012
Japan 1984-2012
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
• behaviour of non-financial businesses
implication:
– 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
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 required
2. intentional
– fiscal policy (eg Japan 1992-2013); 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
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 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 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]
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) ].
Global Financial Balances 1988-2012
Private Sector Balances 1984-2012:
1988-2012: World
10
Surplus
private sector
8
government sector
surplus as percent of GDP
6
4
2
0
-2
-4
-6
estimated
-8
Deficit
-10
1984
1988
1990 1988
1992
199419921996
1996 2000
1998
2000
2002
2004
2004
2006
2008 2008
2010
20122012
source:
source: International
International Monetary
Monetary Fund,
Fund, "World
"World Economic
Economic Outlook
Outlook Database"
Database" (Sept
(Sept 2011);
2011); plus
plus KR
KR estimates
estimates
USA 1988-2012
Private Sector Balances: USA
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Oct 2013)
2012
New Zealand 1988-2013
Private Sector Balances: New Zealand
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
source: IMF, "World Economic Outlook Database" (Apr 2014)"
2008
2010
2012
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]
United Kingdom 1988-2013
Private Sector Balances: United Kingdom
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012
China 1988-2013
Private Sector Balances: China
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012
Germany 1988-2013
Private Sector Balances: Germany
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012
Spain 1988-2013
Private Sector Balances: Spain
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012
Sweden 1988-2013
Private Sector Balances: Sweden
15
10
surplus as percent of GDP
Surplus
foreign sector
government sector
private sector
5
0
-5
-10
Deficit
-15
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012
Norway 1988-2013
Private Sector Balances: Norway
20
Surplus
foreign sector
government sector
private sector
15
surplus as percent of GDP
10
5
0
-5
-10
-15
Deficit
-20
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
source: International Monetary Fund, "World Economic Outlook Database" (Apr 2014)
2012