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Tuesday, January 05, 2010


what does negative net national savings mean?

mike mandel published this disconcerting blog post recently which includes a depressing chart of net national savings -- that is, the aggregate of private and public sector savings as a percentage of GDP.

what does this mean?

it's often stated, particularly loudly by keynesians wary of debt deflationary spirals, that the net fiscal surplus (deficit) of a currency union (such as the united states) must be zero. for example, ed harrison:

Simply put, if you look at all of the households and businesses that make up the private sector and aggregate them together, you can determine if the private sector has a net surplus or a net deficit in any individual time period. And if the private sector has a net surplus, the combined foreign sector and public sector must have a deficit for that time period. The sector financial balances move in concert.

harrison cites scott fullwiler.

Most importantly, the economy’s financial flows are a closed system, so one sector’s deficit is another’s surplus, and vice versa. There is no way around it, just as it is impossible for every country in the world to have a trade surplus—at least one country must have a trade deficit for the others to have surpluses. Thus, “national saving” as defined in the textbooks (private saving + government surplus + foreign saving) is a misleading concept in our monetary system, since if the government is “saving” some other sector (or combination of them) must not be, by definition.

Private Sector Surplus or Net Saving = Government Deficit + Current Account Balance

The trade balance (exports – imports) is not the precise term to use when considering all financial flows, the current account balance is. For the US, the two very close in magnitude. We’ll call equation 3 the Sector Financial Balances (SFB) equation. Again, this is an accounting identity, not theory. Disagreeing with it is akin to believing the earth is flat. For examples of this framework directly in use on this blog, see here and here.

which is, to paraphrase fullwiler, that mandel in taking the sum of public and private savings to mean something is engaging in a mistake of neoclassical economics by conflating the two -- when in fact public saving is essentially the identical opposite of its private counterpart (less the current account balance). as such, the only meaningful measure of net national savings is the current account balance.

as mandel is trying to sum public and private sector savings, those being equal but opposite net of the current account balance, his result should then resemble the current account balance. the two graphs resemble one another broadly, but with some outstanding differences. recent months show a large contraction in the current account deficit with further "dissavings" in mandel's data. and there's also a bulge in mandel's net savings graph during the late 1990s that is not reflected in the current account balance, as well as another one between 2004-7. why?

i suspect on cursory inspection financial sector leverage. without having seen his data, mandel is aggregating government, household and corporate savings data -- but doesn't explicitly mention the financial sector, which is often separated. mandel's measure of savings is higher across the board for the period -- one of continuous financial sector expansion -- and particularly at odds with the current account balance during periods of extensive financial balance sheet growth. as such financial liability expansion also creates assets and income in a stock-flow model, which would then show up in savings, it would go a long way toward explaining the difference had mandel overlooked financial sector balances, both on- and off-balance sheet. it would further explain the lack of any "net savings" improvement since the start of the crisis -- as the financial sector was suddenly and rapidly thrown into delevering, assets were being destroyed and money disappearing from the system. the resultant loss of savings in spite of the government's best efforts could explain how the current account deficit suddenly improved while "net savings" actually declined.

fullwiler goes on to construct an sector financial balance (SFB) model of aggregate demand in figure 6 which he then applies to the leverage-based economic expansion of the 1990s.

First, the economy starts the mid-1990s at point A. The effects of previous and then new agreements between Congress and the President to reduce deficits shifts the Gov Def + Curr Acct line down, as do the financial crises in Asia that lead weakened those nations’ economies and currencies to thereby substantially lower the trade balance. However, instead of GDP falling as a result of these two leakages from aggregate demand, a number of factors including the massive rise in the stock market and “new economy” expectations leads to a historically large increase in the private sector’s willingness to leverage (which continued in the 2000s during the real estate boom after a short recession in 2001-2). This willingness to leverage shifted the PSFB (private sector financial balance) line down markedly, raising real GDP growth and lowering unemployment. The economy ends the decade at a point like B, with a government budget surplus and current account deficit combining to equal a negative private sector balance.


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