CLICK CHART TO ENLARGE So Long Mr. F. (R.I.P)
Canada's Minister of Finance suddenly resigned earlier this week. The government's major fiscal policy plank is to "balance the budget" next year in 2015 and according to their press briefs and ex-Minister in charge Mr. Flaherty, that goal will be reached for sure; no need to stick around. All is well, carry on.
I don't have a Canadian chart equivalent but the chart mashup shows the U.S. sectoral balances to demonstrate that a country with a modern monetary system and who is an autonomous issuer of its own non convertible currency can always pay its federal government bills and when necessary can go into a deficit at the federal level to do so. The bottom panel shows the U.S. sectoral balances going back to post WWII and for most of the time the feds ran a deficit.
The ability to deficit finance is a feature that does not extend to provincial or municipal (state & local) governments nor does it extend to the corporate and household private sector; everyone except the federal government has to operate on surpluses otherwise they run out of credit (Greece, Detroit, BlackBerry etal).
What does the sectoral balance chart show? The Private Sector balance (Savings less Investment) plus the Public Sector Balance (Taxes less Government Spending) plus the Foreign Sector Balance (Imports less Exports) always results in a balance sheet bottom line of zero! It can be no other way; it's an accounting fact. it's the way we keep score.
Canada's Minister of Finance suddenly resigned earlier this week. The government's major fiscal policy plank is to "balance the budget" next year in 2015 and according to their press briefs and ex-Minister in charge Mr. Flaherty, that goal will be reached for sure; no need to stick around. All is well, carry on.
I don't have a Canadian chart equivalent but the chart mashup shows the U.S. sectoral balances to demonstrate that a country with a modern monetary system and who is an autonomous issuer of its own non convertible currency can always pay its federal government bills and when necessary can go into a deficit at the federal level to do so. The bottom panel shows the U.S. sectoral balances going back to post WWII and for most of the time the feds ran a deficit.
The ability to deficit finance is a feature that does not extend to provincial or municipal (state & local) governments nor does it extend to the corporate and household private sector; everyone except the federal government has to operate on surpluses otherwise they run out of credit (Greece, Detroit, BlackBerry etal).
What does the sectoral balance chart show? The Private Sector balance (Savings less Investment) plus the Public Sector Balance (Taxes less Government Spending) plus the Foreign Sector Balance (Imports less Exports) always results in a balance sheet bottom line of zero! It can be no other way; it's an accounting fact. it's the way we keep score.
| (S-I) + (T-G) + (M-X) = 0 | Net Private Sector (Savings less Investments) plus Net Government (Taxes less Spending) plus Net Trade (Imports less Exports) equals Zero |
| This: (S-I) + (T-G) + (M-X) = 0 | In terms of the private sector: (S–I) = (G–T) + (X–M) |
ie: The private sector balance is equal to the addition of the government and trade balances; or "... private sector saving is the source of net finance for the government deficit and the international capital account deficit." Source Material: monetaryrealism.com
- If society wants more private sector saving (which is the source of investment capital), then either the Federal government must run a bigger deficit or exports must increase.
- When the government runs a surplus, then the private sector must run a deficit unless exports are booming and make up the difference.
Well guess what folks... Canadian exports are not booming, there is a global slowdown in demand for commodities, finished products and services and a falling CA$ which is good for exporters has not yet materially changed the current account balance which remains in a deep funk since the Pit of Gloom in March 2009. The CA$ dropping is however affecting the private sector balance with increased costs on import prices and a rising cost of living for our consumer dominant society.
CLICK CHART TO ENLARGE
I suspect that Mr Flaherty and Canadian Finance Ministry staff have seen a sectoral balance chart before and they know that their federal government surplus goal IS GOING TO DEPRESS THE PRIVATE SECTOR EVEN FURTHER because the math tells us that a shrinking federal government deficit in the absence of a positive current account increases the private sector deficit and forces the private sector to either sell off assets (labour, equipment, and fixed assets like real estate) or go deeper into hock to maintain spending (lifestyle).
But the government also knows that their ideological policy of "balancing" the federal budget always sounds good in question period and in media sound bites because every tax payer has a visceral reaction to the notion of having to balance 'the budget" and this fear of "going broke" is a prelude to staging the coming federal election where we will hear that the federal "surplus" will be "spent" funding the most deserving lobbies and loyalists and that will energize the job creators.
Look at the chart again and notice the U.S. federal government surplus during the Clinton years of the late 1990's and the subsequent March 2009 crash and reversal back to federal deficit financing. The federal surplus led directly to the private sector deficit which caused weak hands to liquidate, repair balance sheets and build up savings again.
So Long Mr. Flaherty, nice timing on your exit. The new guy Joe Oliver cut his teeth with Merrill Lynch investment banking and probably also understands sectoral balances but finance ministers are hired on ideology not merit.
Jim Flaherty (1949-2014) died April 10, 2014 soon after his resignation.
But the government also knows that their ideological policy of "balancing" the federal budget always sounds good in question period and in media sound bites because every tax payer has a visceral reaction to the notion of having to balance 'the budget" and this fear of "going broke" is a prelude to staging the coming federal election where we will hear that the federal "surplus" will be "spent" funding the most deserving lobbies and loyalists and that will energize the job creators.
Look at the chart again and notice the U.S. federal government surplus during the Clinton years of the late 1990's and the subsequent March 2009 crash and reversal back to federal deficit financing. The federal surplus led directly to the private sector deficit which caused weak hands to liquidate, repair balance sheets and build up savings again.
So Long Mr. Flaherty, nice timing on your exit. The new guy Joe Oliver cut his teeth with Merrill Lynch investment banking and probably also understands sectoral balances but finance ministers are hired on ideology not merit.
Jim Flaherty (1949-2014) died April 10, 2014 soon after his resignation.
"So Long Marianne" Leonard Cohen
Live at Wembley Arena, London 2012
Live at Wembley Arena, London 2012
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