Understanding the ‘Three Balances’

This 14 minute animated video is a nice introduction to the Three Sectoral Financial Balances, which are an important part of macroeconomics, or the study of the economy as a whole. The dialogue sounds a little odd, but stick with it.

The video helps to dispel some myths about the desirability or otherwise of government budget deficits and surpluses, and how the associated money flows interact with the rest of the economy: the private sector (firms and households) and the foreign sector (the rest of the world).

In particular, the discussion outlines how the US government ran budget surpluses in the late 1990s, but also how this was more than offset by the private sector deficit, and the resultant accumulation of private debt, which ultimately proved unsustainable.

The post-Keynesian economist Wynne Godley, originator of the Three Balances approach, warned about this in 1999 here, and forecast a recession, accompanied by rising unemployment and government deficits, as these trends necessarily began to unwind over the medium term.

It’s the private debt, stupid

An eleven-minute interview with post-Keynesian economist Steve Keen, which begins one minute into the video. He discusses the huge accumulation of private debt in the US and how it is to blame for the Great Recession and the aftermath of sluggish growth. This story has been repeated in many countries across the world. In my view this is only part of the story, but it is an essential part. He usefully counters the hysteria over public debt and the ignorance over levels of private debt with some lessons from history.

The golden rule of public debt

Nation states borrow to provide public capital: For example, rail networks, road systems, airports and bridges. These are examples of large expenditure items that are more efficiently provided by government than by private companies. The benefits of public capital expenditures are enjoyed not only by the current generation of people, who must sacrifice consumption to pay […]

via The golden rule of public debt — LARS P. SYLL

Binding fiscal policy

The UK chancellor, George Osborne, today announced that he intends to legally bind current and future governments to running a budget surplus (an excess of tax receipts over spending) when the economy is growing. Does this make sense? The answer must be no. Continue reading

When and how will UK trade rebalance?

In my previous post, I suggested that for UK public (and private) debt to fall sustainably would require a dramatic shift in the current account from deficit to surplus, which would need to be maintained for a number of years. I also suggested that this seemed an unlikely scenario in the medium term. The UK current account deficit hit 6% of GDP in the third quarter of 2014 and has averaged over 5% for more than a year. Continue reading

How the UK economy can reduce its public and private sector debt

The UK’s current account deficit recently made the economic headlines, hitting 6% of GDP in the third quarter of 2014. Indeed, the BBC’s economics editor Robert Peston has been worrying about it for some time and commented on this statistic in his last blog before Christmas. As he says, the UK chancellor of the exchequer George Osborne and the Prime Minister David Cameron, publicly obsess about the public sector deficit, claiming that it is the UK economy’s major problem, but choose not to mention the current account deficit, which has been over 5% of GDP for 15 months. Continue reading