chpc.biz
  • Home
  • Chart Book
    • 6 Canadian Metros
    • Vancouver Housing
    • Calgary Housing
    • Toronto Housing
    • Compare Toronto & Vancouver
    • Housing Price Momentum
    • Sales Listings
    • MAR-MOI
    • Real Price of Housing
    • TSX Indexes
    • Bitcoin Gold & RE
    • Millionaire Metric
    • Real Price of Gold & RE
    • Canadian Housing in USD
    • Housing Starts
  • Plunge-O-Meter
    • Real Interest Rates
    • Real 10yr Rate
    • Interest Rate Spread
    • Yield Curve
    • Yield Calculator
  • Employment
    • Earnings
    • Household Debt
    • Affordability
    • Demographia
    • Census
  • History Readings
  • For Sale CHPC
    • Contact
    • Data Sources
    • Featured Links
    • Terms of Service

Myth Making

4/22/2015

 
CAD Budget 1949-2015CLICK CHART TO ENLARGE
Balanced Budget Bluster

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:
  1. Public (Fed Gov't)
  2. Private Sector
  3. 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. 

U.S. sectoral financial flows add up to zero.
CLICK CHART TO ENLARGE
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)

  • 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.
The algebra can also be shorthanded to: S = I + (S-I) 

(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.
  • 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:
"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.

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
CLICK CHART TO ENLARGE
Japan's Financial Sector Balances

After reading the "Why is the chart above a big idea?" 


...and now that you grok: 

(S–I) = (G–T) + (X–M)

Then you realize that a Federal Government Budget Surplus will suck the economy out of the Private Sector and send it into recession as the Private Sector is forced to spend its savings or take on more debt.

The Japanese 5 year Surplus (1988-1992) forced their Private Sector to go into a negative balance sheet position and a very long subsequent period of asset deflation as their savings were spent and their assets were sold off. 
Japan: Deflation Model
CLICK CHART TO ENLARGE
Japan's Financial Sector Balances with the
CLICK CHART TO ENLARGE
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.

Japan like the U.S. and Canada, also has a modern fiat monetary system where the nation is an autonomous issuer of their own non convertible currency. 


As can be seen by the charts, they are not solvency constrained. They can always pay their bills, as can the USA and Canada unless of course politicians vote to declare bankruptcy.

Read  Rebecca Wilder's explanation (January 22nd, 2012) of the Japanese experience. "As with all credit cycles, the burden of debt falls on the government as the private sector recoups. 


However, in Japan’s case the government missed a great opportunity for structural reform before the crash associated with credit cycles in other major developed economies (the USA)."
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.”
Picture

Worried About a Canadian Housing Bust?

Canada's Personal Savings 1961-2015CLICK CHART TO ENLARGE
BMO study finds nearly 20% of Canadians surveyed didn’t save a dime in 2014

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.



Still with me? Here's your treat: "POLITICIAN"
Jack Bruce, Robin Trower & Gary Husband
Seven Moons Tour 2008



GO TO THE MOST RECENT BLOG POST

 

Follow @Brian_Ripley

Comments are closed.
    Follow @Brian_Ripley

    RSS Feed


    Picture


    History, Charts & Curated Readings

    "History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'


    Archives

    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012

    Categories

    All
    AI
    Airbnb
    Apt
    Austerity
    Australia
    Balance Of Trade
    BNN
    BTC
    Bubbles
    Budget
    Bulls
    Busts
    Calgary
    Canada
    Capital Flight
    Case Shiller
    Case Study
    Charlie Rose
    China
    Chris Kimble
    Climate
    Cmhc
    Commodities
    CPI
    Credit
    Cullen Roche
    Currency
    Debt
    Deflation
    Demographics
    Dubai
    Employment
    Energy
    Environment
    Europe
    Exports
    Fair Value
    Flippers
    Future
    FX
    GDP
    Gold
    Greenspan
    Hong Kong
    Hyperinflation
    Id
    Imports
    Inflation
    Interest Rates
    Japan
    Labour
    Martin Armstrong
    MM
    Money Laundering
    Money Velocity
    Montreal
    Mortgage
    Net Worth
    New York
    OECD
    Oil
    Olympic Village
    Pandemic
    Pmi
    Poverty
    Productivity
    Recession
    REIT
    Rent Or Buy
    Russia
    Savers
    Savings
    Solar Cycle
    Stock Market
    Super Rich
    Tax
    Technology
    Tesla
    Toronto
    Trade
    Trump
    TV
    U.K.
    Unemployment
    U.S.
    Vancouver
    Victoria
    Wages
    War
    Weather
    Whale Watching
    WTO
    Yield

    "Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense​​
Home | Chart Book | Earnings | Plunge-O-Meter | History & Readings | Contact

BRIAN RIPLEY'S CANADIAN HOUSING PRICE CHARTS & Blog for
#Vancouver #Calgary #Edmonton #Toronto #Ottawa #Montreal
Real Estate Prices, Sales & Inventory with Plunge-O-Nomic Post Peak Price Action featuring the PLUNGE-O-METER
Data reporting changes by Real Estate Boards and other data collection notes are listed on the DATA SOURCES page.

If you want to be notified when I update this site, go to: twitter.com/Brian_Ripley and click "Follow".

GET A FREE TRIAL DISCOUNT TO CHRIS KIMBLE'S FINANCIAL MARKETS CHARTING SOLUTIONS
ADVERTISE YOUR REAL ESTATE FOR SALE TO THIS INFORMED AUDIENCE
Thousands of Unique Visitors and Page Views Every Month TRAFFIC CHART

Picture
Picture
Picture

Weebly - Websites, eCommerce & Marketing in one place.
Compare Weebly Plans
​This website & blog was built with Weebly; a very easy to use drag and drop cloud based app. TRY IT FOR FREE​
CHPC.biz (this site) is a SAFE BROWSING SITE according to Google's Safe Browsing Diagnostic

  • Home
  • Chart Book
    • 6 Canadian Metros
    • Vancouver Housing
    • Calgary Housing
    • Toronto Housing
    • Compare Toronto & Vancouver
    • Housing Price Momentum
    • Sales Listings
    • MAR-MOI
    • Real Price of Housing
    • TSX Indexes
    • Bitcoin Gold & RE
    • Millionaire Metric
    • Real Price of Gold & RE
    • Canadian Housing in USD
    • Housing Starts
  • Plunge-O-Meter
    • Real Interest Rates
    • Real 10yr Rate
    • Interest Rate Spread
    • Yield Curve
    • Yield Calculator
  • Employment
    • Earnings
    • Household Debt
    • Affordability
    • Demographia
    • Census
  • History Readings
  • For Sale CHPC
    • Contact
    • Data Sources
    • Featured Links
    • Terms of Service