
Joe Oliver presented the delayed Government's budget yesterday and touted it as "balanced". All the fuss was done to lead off the Government's campaign into the upcoming October Federal Election by assuring voters of the incumbent's prowess as responsible managers.
Journalists coming out of the lockup were quick to make the point that the "balance" ie: slightly more revenue than expenditure, is a product of selling assets, reducing federal expenditures and delaying "promises" into the future.
To assuage our fears, the government will spend $7.5 million (The Tyee) of our tax-payer money beginning next month to encourage us to continue voting for the present management.
One problem that is never discussed in the mass media is the lack of understanding about how a modern national economy like Canada, which has the authority to issue and enforce the use of its own currency, actually works.
There are 3 sectors to the national economy in terms of income and expense:
- Public (Fed Gov't)
- Private Sector
- Foreign Trade
And the simple balance sheet equation is that the net sum of the 3 sectors have to balance to zero, ie:
Net Public Sector+Net Private Sector+Net Foreign Trade Sector = 0
The result of this accounting reality is that:
- If society wants more private sector savings, 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.
Most people on the political right or left are programmed by their ideological beliefs and have never been presented with the above accounting reality.
Yesterday's heralding of the budget does nothing but further limit the Private Sector.
Because the current federal government has been methodically cutting its own spending since taking over in 2006, today, Canadians have fewer choices to maintain their lifestyle. They either have to continue to drain their savings or take on more debt, or find new earning sources (the search for yield).
Since the Pit of Gloom in 2009, the Feds have been on an ideological mission to "balance" the federal budget by ignoring the Negative Trade Balance and by adding to the Negative Private Sector Balance.
The following is an abstract of some of Cullen Roche's observations about how a modern national economy works with links to further reading. I originally posted this in June of 2012.
Why is the chart above a big idea?
Because it helps to to objectively describe the operational realities of economies that operate on a fiat monetary system. A modern fiat monetary system is one where the nation is an autonomous issuer of their own non convertible currency which exists within a freely floating exchange rate system (the U.S is the example here, but Canada and Japan are appropriate examples as well). It also proves that:
(S-I) + (T-G) + (M-X) = 0
In other words 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.
This rearranges to: (S–I) = (G–T) + (X–M)
ie: The private sector balance is equal to the addition of the government and trade balances; or "... that private sector saving is the source of net finance for the government deficit and the international capital account deficit."
Source Material (monetaryrealism.com)
The algebra can also be shorthanded to: S = I + (S-I)
- If society wants more private sector savings, 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.
(S – I) = (G – T) + (X – M)
S = I + (G – T) + (X – M)
S = I + (S – I)
Private sector saving = investment, plus the change in private sector net financial assets, or
Private sector saving = investment plus private sector net financial asset accumulation.
Investment is funded by three sources of saving: private sector saving, government saving, and foreign saving. Among other things, given the presence of government and foreign sector saving contributions, the term S must cover the saving contributed by the remaining sector, which is the private sector.
In particularly, S does NOT stand for household saving alone.
"Saving is a flow. I think it’s sometimes easier to understand our thinking on S=I+(S-I) as a stock of assets and liabilities. For instance, in the USA, the total net worth of the private sector is $63T. Of this, about $15T is government net financial assets. The rest is private sector assets like common stocks, real estate, etc. The flows of spending in the economy help the private sector to generate these stocks (govt deficit spending results in a stock of net financial assets). But the private sector is not built on a stock of government net financial assets. It is built on a stock of private sector assets.
- Household and business sectors are consolidated into a single private sector that includes both household and business saving.
- The equation itself has no inherent model or ideological content.
- An explanation (Nov 19/12) from Cullen Roche:
The primary purpose of S=I+(S-I) is about understanding that the private sector generates most of its net worth via the "I" component. That is, it is via investment that we build the majority of our financial assets. MMT ('Modern Monetary Theory' as opposed to MR 'Monetary Realism' which is the view presented here) argues that the economy is built around the government stock of financial assets through govt spending.
Like all things in MMT, the argument is government centric. This is a misrepresentation of the way our balance sheets are built. They are not built around govt NFA (net Financial Assets), but around private sector financial assets that derive from Investment.
So, when MMT defines net saving as S-I they are essentially marginalizing the most important part of the entire Saving equation by subtracting I from S. This is not an accurate portrayal of the way our monetary system exists. The economy is built on a base of primarily private sector assets that develop via Investment. Hence, the clarification of S=I+(S-I)."
This operational reality is widely unrecognized or worse unvoiced among academic, political, business, media and commentators at all levels of discourse.
One of the main educational proponents describing how this modern monetary system works and what social benefits can flow from this knowledge is Cullen Roche who says:
"One of the great problems with the economics profession is that there is no firm foundation of understanding from which analysts can build their policy prescriptions. Further, one tends to find schools of thought based on normative rather than positive thinking; prescriptive rather than descriptive.
The MR (Monetary Reality) approach is similar to that utilized by Leonardo Da Vinci regarding medicine and human anatomy. Da Vinci viewed the human body as a machine and as one of the first anatomists provided the world with a better understanding of how that machine functioned (e.g. how its pieces worked together, how it was built, how it changed, etc). To Da Vinci, it was all about finding out what IS, not what CAN be. It was only through rigorous analysis of how the machine worked that he and others were able to be in a position to offer advice on medicine and surgery.
The “dismal science” need not be so unscientific. Unfortunately, most of its practitioners are trying to be Hippocrates and not Da Vinci. And like the surgeons of the days of Hippocrates, they do not know how the system works and while they might believe they will “do no harm” too many are too often working from a false premise or a false understanding of the system due to a preconceived ideology. It is my hope, through MMR and a true focus on understanding how the system actually works, that we can provide as close as possible to a purely positive approach to economics. I know this is a bold task, but through focusing on the understanding of the monetary system we can then provide others with a foundation from which our problems can be solved."
Read the full article here:
http://monetaryrealism.com/understanding-mmr/
And also read Joe Weisenthal's "How the Clinton's Budget Surplus Destroyed The American Economy" for an insight into the U.S. experience after the incorrectly lauded Clinton Surplus and the aftermath that is still with us...
"The bottom line is that the signature achievement of the Clinton years (the surplus) turns out to have been a deep negative. For this drag on GDP was being counterbalanced by low household savings, high household debt, and the real revving up of the Fannie and Freddie debt boom (Mortgage Backed Securities) that had a major hand in fueling the boom that ultimately led to the downfall of the economy."
Japan's Financial Sector Balances |
Above is another view of Japan's Financial Sector Balances with the "Private" Sectoral Balance broken into its two components of Corporate and Household Net Savings. |
The following is from PragCap.com edited by Cullen Roche, December 18, 2012 taken from research by Tanweer Akram of ING discussing the economics of Japan over the course of their continuing balance sheet recession.
“The Bank of Japan’s balance sheet had been bloated even before the 2008 global recession forced central banks the world over to expand theirs. However, despite years of an expanding monetary base — and contrary to monetarist mantras — Japan remains mired in deflation (see Chart Figure 29 above). Japan’s experience since the turn of the century validates the contemporary understanding of monetary policy and central banking, which holds that the expansion of central bank’s balance sheet does not necessarily lead to higher inflation. Increases in reserves are merely outcomes of the expansion of the central bank’s balance sheet; they do not directly affect bank lending or credit growth, and inflationary pressures may not arise unless credit growth fuels economic activity. This is particularly true when an economy is characterized by excess slack and spare capacity, as Japan’s is.”
“Understanding sector balances in Japan can provide useful insights about the evolution of the Japanese economy. Japan’s domestic sector balance had been weakening in the late 1980s, preceding the bursting of its real estate and equity asset bubbles. Japan has been fairly consistently running current account surpluses over the past three decades, contributing to the surplus of its domestic private balance. However, its general government deficits declined from 1988 to 1991, going from nearly 5% of nominal GDP to a surplus. The decline in the government deficit resulted in the weakening of the surplus in the country’s domestic private balance. In response to slower growth and fiscal stimulus, the surplus in domestic private balances rose in the mid-1990s as the government deficit rose, helping to partly — but slowly — repair the balance sheets of the private sector. Since the mid-1990s, current account balances stayed in the range of around 1.5% to 5.0% of nominal GDP while general government deficits have varied from 2.0% to 10.0% of nominal GDP. Clearly the change in general government deficits has been the main driver in the variation of domestic private balances. As the domestic private sector deleveraged and spurned debt to repair their balance sheets after the bursting of asset bubbles, the government had to run deficits in order to prevent the economy from failing into a tailspin.
Japan’s current account surplus could decline in the coming years, particularly as the country’s export growth slows due to stiff competition from various Asian countries and the strength of the Japanese yen, and as Japan’s energy import bill rises going forward. Remarkably, the Japanese yen had appreciated through the lost decades, thereby limiting the international competitiveness of Japanese exports, while creating deflationary pressures domestically. If in the coming years Japan’s current account surplus diminishes, its government deficits must get larger to retain the domestic private sector’s surplus at its current ratio.”
Worried About a Canadian Housing Bust?

Financial Post April 7, 2015 via Canadian Press
A new survey of Canadians found almost 20% of respondents didn’t put aside a dime in 2014 and a further 40% felt they were not saving enough.
This year’s household savings report from BMO Financial Group says 31% of respondents had a fixed savings plan in place that included monthly contributions.
That was a significant increase from the previous year when only 26% reported implementing such a plan.
The BMO study also revealed that a third had less than $10,000 in savings.
Money for vacations was the most common goal among savers, while 43% were saving for retirement and 40% for emergencies.