New Economic Perspectives has the article When Will the White House and OMB Ever Learn About Sector Financial Balances? by Joe Firestone.
The Sector Financial Balances (SFB) model is an accounting identity, and these are always true by definition alone. The SFB model says:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.
However, the “accidental deficits” produced will not be big enough, nor targeted well enough to prevent continuing stagnation. In my next post, I’ll look at the Congressional (CPC) budget and see if the CPC has yet learned the lesson that projections that don’t take sectoral financial balances into account project private sector results that are far from consistent with what is necessary for a robust and just economy.
For those of you who don’t cotton to equations, I have prepared a picture for a blog post I will be publishing one of these days. [For a deeper discussion with even more pictures, see my previous post Diagrams and Dollars: Modern Money Illustrated (Part 1 & 2)]
Each arrow in the above picture represents a flow from one pot to another. A flow into a pot is positive for that pot, and a flow out of a pot is negative for that pot. If all four arrows at the mouth of any pot sum to a negative number, then you have a deficit for that pot. If greater than zero, the pot has a surplus. What is a deficit for a pair of arrows at one end of the pair is a surplus at the other end of that pair.
What Joe Firestone called an “accounting identity”, I explained in the following words:
There is no other flow of money. None rains in from the sky. None falls on the floor.
What the zero on the right hand side of Joe’s equation, (Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0), is the equivalent of what I said above. The zero accounts for all the other flows. There aren’t any.
If you can think of a flow of money that is not in one of these sectors, please do enlighten us. I’d be willing to bet that whatever you come up with is actually in one of the above mentioned sectors (pots).
Oh, and the point is what? The Republican budgets, the White House OMB budgets, and even Democratic budgets are based on the premise that the equation is not true, or the fact that these three pots are not the only ones. If you cannot believe what is obvious to me and to Joe Firestone, and the whole world of Modern Money Theorists, then I challenge you to come up with some other explanation.
September 22, 2017
Please read my subsequent post What Is Missing In Modern Money Theory (MMT)? It casts a little shadow on the certainty of this post. It shows that the other pots can create money that sure economically acts a lot more like USA money than MMT imagines.
November 13, 2018
Michael Hudson’s book Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, made me see the key difference between Fed money and private bank money. Essentially, it is all about the interest charges. MMT says that, but the significance didn’t quite strike me until I read the book.
March 23, 2020
Recently, I have come up with words that better explain the difference between what private banks create and what The Federal Reserve Banks create. MMT calls what the Fed creates “high powered money”. What private banks create are promises of money. Briefly, private bank accounts and loans provide you with a promise of “high powered money”. Private banks only have to fulfill their promise when you try to use that promise outside the bank. If a person deposits your check into his or her account in the same bank, the bank only has to transfer their promise of money from your account to the payee’s account. Given the inflow and outflow of “high powered money”, the bank only has to worry about the net difference between the two flows. Banks know that under normal circumstances, that difference is very small compared to the promises they have made. It is only when that difference is much larger than usual that anybody would even have an inkling that there is a difference between “high powered money” and a private bank’s promise of money.
Here is a recent post that compares my explanation with an old video of the official MMT explanation – Loans Create Deposits: Inside vs Outside Money – March 19, 2020