Flow-of-funds and sectoral balances

I have noted some misperceptions about the derivation, meaning and application of the so-called sectoral balances framework that is used in Modern Monetary Theory (MMT) to help explicate the relationship between the government and the non-government sectors. Some of this confusion appears to be the product of a deeper misunderstanding of the difference between stocks and flows and relationships between flows in economics. Those who conclude that this framework is really just an accounting structure are incorrect. Equally, those who conclude that the accounting relationships that are part of the sectoral balances framework are matters of interpretation are also incorrect. It should be clear that the sectoral balances framework combines accounting structures, which are derived from the national accounts framework used by statisticians to measure economic activity, and theoretical propositions, which seek to explain relationships between variables within the accounting structures. In other words, we need to understand both the accounting aspects that are true by definition as well as the underlying theoretical structures which drive the balances.

One reader suggested that a Jeremy Corbyn adviser had largely dismissed the sectoral balances framework as having any economic content as evidenced by this Tweet (October 29, 2015):


I was also referred to a recent blog written by the senior economist at the British TUC – Fiscal fallacies (2): accounting identities and the case for government loan-expenditures – which appears to entertain the view that the sectoral balances framework provides a “case for expansionary policy”.

Both these inputs are unhelpful.

Background to the flow-of-funds approach

The sectoral balances framework is intrinsically linked to the flow of funds analysis. An early exponent of the flow-of-funds approach, Lawrence Ritter wrote in 1963 that:

The flow of funds is a system of social accounting in which (a) the economy is divided into a number of sectors and (b) a “sources- and-uses-of-funds statement” is constructed for each sector. When all these sector sources-and-uses-of-funds statements are placed side by side, we obtain (c) the flow-of-funds matrix for the economy as a whole. That is the sum and substance of the matter.

[Full reference: Ritter, L.W. (1963) ‘An Exposition of the Structure of the Flow-of-Funds Accounts’, The Journal of Finance, 18(2), May, 219-230]

The flow-of-funds accounts allow us to link a sector’s balance sheet (statements about stocks of financial and real net wealth) to income statements (statements about flows) in a consistent fashion. That is flows feed stocks and the flow-of-funds accounts ensure that all of the monetary transactions are correctly accounted for.

This approach underpinned the work of the so-called New Cambridge approach who were part of the Cambridge Economic Policy Group at the University of Cambridge in the early 1970s. Key members of this group were Martin Fetherston, Wynne Godley and Francis Cripps, who were from a Keynesian persuasion but departed from the usual Keynesian thinking when it came to balance of payments issues. I will leave that discussion for another day.

While the sectoral balances approach had been understood much earlier (for example, by Nicolas Kaldor and others), it became popularised by the New Cambridge macroeconomics analysis which introduced the concept of the net acquisition of financial assets of the private sector (NAFA) into the forefront of its Keynesian income-expenditure model.

Like Lawrence Ritter, the Cambridge economists considered it interesting to trace the flow of funds between the different sectors of the economy, which they divided into three sectors:

1. The government sector – which comprised all levels of government and their agencies.

2. The private domestic sector – which comprised households and firms ( including banks).

3. The external sector – which comprised all non-residents (private households, firms and governments).

From an Modern Monetary Theory (MMT) perspective (2) and (3) comprise the non-government sector.

After all the transactions have flowed in any given period, any one of these sectors could record a financial deficit or surplus. A financial deficit (surplus) is defined as a state where total income is less (more) than the sector’s spending.

So for the private domestic sector, it is in financial surplus (deficit) when its disposable income exceeds (is less than) its spending on consumption goods and/or investment goods.

The external sector is in surplus (deficit) when total export revenue is greater than (less than) the payments for imports. The external balance includes the so-called net primary and secondary income flows that accrue to residents as a consequence of interest and dividends received on overseas ownership (offset by similar payments to foreigners).

While the trade balance refers to the difference between export and import revenue on goods and services, the external sector balance overall is equivalent to the Current Account balance that includes the net income flows.

The government sector deficit (surplus) arises when total government expenditure is greater than (less than) total tax and other revenue.

The interpretation of these balances in the New Cambridge approach, is that when a particular sector has a financial surplus (that is, its income exceeds its expenditure) it is able to add to its net financial assets through additional purchases of new assets or reducing its existing debt obligations.

MMT adopts the same interpretation although when applied to the government sector to conclusion is somewhat meaningless other than in a purely accounting sense.

The New Cambridge expression for the private sector NAFA(p) is:

(1) NAFA(p) = Yd – (C + I)

where Yd is total disposable income of the private domestic sector, which is total national income (Y) minus total taxes net of transfers (T); C is total consumption expenditure and I is total capital expenditure including unintended inventory accumulation (investment) of the private domestic sector.

Expression (1) is defined in terms of dollar flows of income and spending.

From a stock prospective, NAFA(p) is also measured by the difference between the stock of net financial assets at time t and the stock at time t-1, where t-1 is some earlier period (t is just a time indicator, so t is now and t-1 might be last year).

Importantly, transactions within the private domestic sector do not alter the net financial position of the sector overall. For example, if a bank creates a loan for one of its customers then its assets rise but on the other side, the liabilities of the customer increases by an equal amount – leaving no change in the net position of the sector.

The only way the private domestic sector can increase its net financial assets is through transactions with the government or external sector – for example, by acquiring a government bond or buying a foreign government bond (or a foreign corporate bond).

Note, if we aggregate the non-government sector then we get the standard MMT result that financial transactions within the non-government sector do not alter the net financial position of that sector. Only financial exchanges between the government and non-government sector can be a source of increased net financial assets in the non-government sector.

Once we understand the interlinked nature of the three sectors then it is a simple step to realise that if one sector has improved its net acquisition of financial assets, that is, achieved a financial surplus, at least one other sector must have reduced its net financial assets or run a financial deficit.

The flow-of-funds framework allows us to understand that the funds a particular sector receives during a period from current receipts, borrowing, selling financial assets, and running down cash balances have to be equal to the total of its current expenditures, capital expenditures, debt repayments, lending, and accumulation of cash balances.

The approach clearly allows us to trace the uses and sources of funds for each sector.

It should be emphasised that the flow-of-funds approach is based on accounting principles rather than being a behavioural (theoretical) framework for understanding how the flows occur. Relatedly, there are no insights into the adjustment processes that govern the change in net financial assets in each sector.

That is not to be taken as a criticism of the approach – it is merely an observation. It also doesn’t reduce the utility and insights that the approach provides. Often economists like to denigrate analyses that manipulate accounting identities as if they are too low brow. But any approach is valuable if it provides useful ways of thinking.

The Sectoral Balances approach

The Sectoral Balances perspective of the National Accounts also brings the uses and sources of national income together.

The most basic macroeconomics rule is that one person’s spending is another person’s income. At the sectoral level the same proposition holds. Another way of stating this rule is that the use of income by one person will become the source of income for another person or persons. Similarly, at the sectoral level.

The National Accounts divided the national economy into different expenditure categories – consumption by persons/households; investment by private business firms; spending by the government; exports to and imports from the foreign sector.

The Australian Bureau of Statistics publication – Australian System of National Accounts: Concepts, Sources and Methods, 2014 – provides an excellent source for understanding the background concepts that are used to derive the sectoral balances framework.

From this framework, economists derived what is called the basic income-expenditure model in macroeconomics to explain the theory of income determination that forms the core of the so-called Keynesian approach.

The income-expenditure model is a combination of accounting identities drawn from the national accounting framework and behavioural theories about how flows of expenditure by households, firms, governments, and foreigners combine to generate sales, which in turn, motivates output and income generation.

Remember, that an expenditure flow is measured as a certain quantity of dollars that is spent per unit of time. So for example, in the June-quarter 2015, the Australian Bureau of Statistics estimated that household consumption in Australia was $220,913 millions in real, seasonally-adjusted terms.

Conversely, a stock is measured at a point in time and is the product of prior, relevant flows. For example, the Australian Bureau of Statistics estimated that total employment in Australia in October 2015 was 11,838.2 thousand. The flows that generated this stock of employment were all the movements of workers between the different labour force categories: employment, unemployment, and not in the labour force.

A flow is like a stream of water measured as litres per second (for example) whereas a stock is like a reservoir level measured at some point in time.

So the way that MMT uses the sectoral balances approach has to be understood not only in terms of the accounting structure that underpins the flow of funds but also in terms of the theoretical conjectures that link the variables within the financial balances and provide some guidance about the way in which the balances adjust once disturbed by external factors.

The accounting aspects that underpin the income-expenditure model draw on different ways of thinking about the national accounts.

First, we can measure the sources of spending that flow into the economy over a given period. Economists use the shorthand expression:

(2) GDP ≡ C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final household consumption spending (C), total private investment including inventory accumulation (I), total government spending (G) and net exports (X – M).

Note the use of the mathematical symbol ≡ which denotes an Identity which is true by definition and the “equivalence … does not depend on the particular values of the variables”.

We often replace it with an equals sign (=) but we always know that this National Accounts Identity is an accounting statement which must always be true.

As it stands, the National Accounting Identity is not a theory. We will come back to that point presently.

Introducing theoretical conjecture allows us to introduce causality and develop an explanation of how expenditure drives income generation. The central role played by the principal of effective demand provides the causal link between expenditure and income.

It tells us that total income in the economy per period will be exactly equal to total spending from all sources but also the process involved that bring that equality into line.

We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all taxes and transfer and interest payments (the latter are not counted independently in the expenditure Expression (2)).

Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).

Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

(3) GNP = C + I + G + (X – M) + FNI

At this stage, we could get quite complicated and consider things like retained earnings in corporations and the like, but here we assume that all income generated ultimately comes back to households (after all the distributions are made).

To render this approach into the sectoral balances form, we subtract total taxes and transfers (T) from both sides of Expression (3) to get:

(4) GNP – T = C + I + G + (X – M) + FNI – T

Now we can collect the terms by arranging them according to the three sectoral balances:

(5) (GNP – C – T) – I = (G – T) + (X – M + FNI)

The the terms in Expression (5) are relatively easy to understand now. The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way).

In other words, it represents private domestic saving.

The left-hand side of Equation (3), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

In other words, the left-hand side of Equation (3) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

The term (G – T) is The government financial balance and is in deficit if government spending (G) is greater than government tax revenue (T), and in surplus if the balance is negative.

Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

In English we could say that:

The private financial balance equals the sum of the government financial balance plus the current account balance.

Note that by re-arranging Expression (5) we get the familiar sectoral balances equation:

(6) (S – I) – (G – T) – CAD = 0

Following our earlier discussion of the flow-of-fund approach made popular by the New Cambridge economists, we can re-write Expression (6) in this way:

(7) (S – I) = (G – T) + CAD

which the New Cambridge economists interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector.

Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

Expression (7) can also be written as:

(8) [(S – I) – CAD] = (G – T)

where the term on the left-hand side [(S – I) – CAD] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

In summary, our interpretation of the sectoral financial balances is as follows:

1. (S – I) is the private domestic financial balance or the NAFA of the private domestic sector. If it is in surplus, then that sector is lending funds to the other sectors. If it is in deficit, then the private domestic sector is borrowing from the other sectors or running down its net financial position in other ways (such as liquidating past wealth accumulation).

2. (G – T) is the government sector financial balance. If it is in surplus then the government sector is spending less than it is taking out of the economy in taxation and undermining the capacity of the two other sectors to accumulate net financial assets and vice versa.

3. CAD is the external sector financial balance. If it is in deficit then the national economy is borrowing from abroad or running down its net financial position in other ways and foreigners are accumulating financial asset claims and vice versa.

These are accounting statements. So in one sense, the claim that the sectoral balances is about accounting is factual. But of course it also is a highly limited conclusion.

At this stage, we know nothing about the state of the economy that would be associated with bringing these balances into line, nor do we know anything about where the economy has been and where it might be heading.

Further, we don’t know what motivates each of the financial balances accounted for.

At this point, to give traction to analysis we need to add theory. As noted above, once theoretical conjectures are included in the framework then we can start to explore causality, adjustment, and understand the state of the economy more fully, including the policy options that might drive the economy to where we want it to go.

The theoretical dimension of the sectoral balances framework takes this well beyond the accounting.

So the income-expenditure model is a theoretical structure that conjectures that changes in these financial balances are driven by national income flows, which in turn, are driven by changing expenditure flows.

For example, there are various theories of household consumption expenditure but all of them suggest that consumption is determined positively by changes in disposable income. The response of consumption to a change in income is called the Marginal Propensity to Consume (MPC). It is normally hypothesised that the MPC will be less than one, so that the residual of disposable income not consumed will be positive. That constitutes saving.

So the private domestic financial balance (S – I) will increase, other things equal, when national income rises.

Similarly, taxation revenue (net of transfers) is considered to be a positive function of national income. So, other things equal, the government financial balance (G – T) falls when national income rises, and vice versa.

Imports are also considered to be a positive function of national income – so when national income rises we buy more locally- produced goods and more imported goods. So the external balance falls when national income rises, and vice versa, other things equal.

We could add more complex theoretical propositions to explain private domestic investment, exports, government spending, and net foreign income transfers. And indeed, larger macroeconomic models do just that.

But the point is that these theoretical conjectures allow us to hypothesise what will happen to the financial balances if there is an external event that leads to income changes.

For example, we might assume the government decides that the level of income is too low because spending is too low relative to full capacity spending and as a result unemployment is too high.

It introduces a discretionary increase in the deficit such that G – T rises. This stimulates national income via the expenditure multiplier process which increases disposable income, consumption expenditure, and household saving. It also stimulates increased import expenditure.

If nothing else changes, Private domestic net financial asset acquisition will increase and the external deficit will increase somewhat. The relationship between the sectoral balances will be maintained but national income will be higher and the net financial assets in the non-government sector will have changed.

More complex theoretical reasoning is obviously possible.

The accounting structures that underpin the sectoral balances framework allows to check logic. For example, if a politician says that the government and non-government should simultaneously reduce their net indebtedness (increase their net wealth) (assuming neo-liberal public debt issuance strategies) then we know that is not possible. We don’t have to resort to theory to make those sort of conclusions.

But the accounting structures do not allow us to determine the validity of a political statement that says that austerity will stimulate growth. At that point we need theory and we can use the sectoral balances framework to draw inferences about which sectors will respond in which way when austerity is imposed.


The sectoral balances framework and the closely related flow-of-funds approach is an extremely useful analytical tool, which is very much underused by economists.

In one sense it is pure accounting. That provides useful insights in its own right. But to really use it as an engine for understanding and analysis we need to marry in theoretical conjectures that allow us comprehend how the balances respond to income shifts and how they correspond to different states of the economy.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    59 Responses to Flow-of-funds and sectoral balances

    1. GrkStav says:

      Hi Bill,

      I believe the following:

      “2. (G – T) is the government sector financial balance. If it is in surplus then the government sector is spending more than it is taking out of the economy in taxation and undermining the capacity of the two other sectors to accumulate net financial assets and vice versa.”

      contains an error.

      If the government sector financial balance is “in surplus” then the government sector is spending LESS than it is taking out of the economy in taxation and undermining the capacity of the other two sectors to accumulate net financials assets and vice-versa, correct?

    2. Jerry Brown says:

      Thanks Professor, this is great stuff. I am confused about this sentence “2. (G-T) is the government sector financial balance. If it is in surplus then the government sector is spending more than it is taking out of the economy in taxation and undermining the capacity of the two other sectors to accumulate net financial assets and vice versa.” Is that sentence written the way you meant it to be?

      Also, the term CAD. I’m hoping that its just a more technically accurate way of saying X-M but X-M is usually close enough to use. Is that the case?

    3. Neil Wilson says:

      “A flow is like a stream of water measured as litres per second (for example) whereas a stock is like a reservoir level measured at some point in time.”

      And importantly measured in litres.

      That makes the two in different units. Confusing the two is like confusing miles and miles per hour.

    4. bill says:

      Dear GrkStav and Jerry Brown

      Thanks for your scrutiny and corrections. I appreciate the help. I was typing fast earlier and these errors are the consequence.

      Fixed now.

      Best wishes

    5. bill says:

      Dear Jerry Brown (2015/11/24 at 16:01)

      The term (X – M) strictly relates to the balance of trade whereas the current account balance includes the net income transfers which contribute to GNP.

      I decided in this derivation to give the exact source of the external financial balances rather than just obscure the net income transfers or assume they were part of net exports.

      Best wishes

    6. Neil Wilson says:

      “For example, if a politician says that the government and non-government should simultaneously reduce their debt levels (assuming neo-liberal public debt issuance strategies) then we know that is not possible.”

      And that is still the key argument at the moment. We haven’t even got to the point where this is a settled fact amongst politicians. Let alone the fact that the government balance is determined more by the savings desires of the population and less by the tax rates and spending – unless government pushes private debt or a recession.

      The problem we have in the UK is that Keynes is venerated like a God and anything he said must be The Truth. This is where balance the current budget and the idea that Liquidity Preference can fix everything comes from.

      Venerating everything Keynes said and did is like venerating everything Newton said – including his extreme Bible Studies and work on alchemy,

      The ‘What would Keynes have said’ nonsense is politics and religion not science.

    7. Neil Wilson says:

      The other mistake I’ve noticed creeping into these discussions elsewhere is also a matter of accounting discipline, and that is failing to understand how Quadruple Entry Accounting works.

      In quadruple accounting there are four entries in the accounts. Two in the financial account and two in the non-financial accounts. This is how the national accounts are constructed. MMT tends to discuss the effect on the financial account and seems to consider the non-financial effects to be consequential like an induction circuit in electric theory.

      I’ve seen a few economists and commentators mix up the non-financial transaction pair with the financial transaction pair and get in a terrible muddle.

      But the important point is that when you get to the ‘net lending/net borrowing’ sectoral figure in both the non-financial and financial accounts *they end up as the same absolute value* – which provides the direct connection between the money and real sides of the economy and anchors the two together, whatever machinations in each side happened to get there.

    8. Ann Pettifor should read Kalecki’s Theory of Economic Dynamics. Kalecki’s work contains insights on the effects of sectoral balances in workers wages and the distribution of income. He also realized that capitalists had an interest in a government deficit financed through debt (corporate welfare) and trade surpluses as the means of expanding profits. “The value of an increment in the production of the export sector will be accounted for by the increase in profits and wages of that sector. The wages, however, will be spent on consumption goods. Thus, produciton of consumption goods for workers will be expanded up the point where profits out of this production will increase by the amount of additional wages in the export sector. It follows, directly from the above, that the export surplus enables proftis to increase above the level which would be determined by capitalists’ investment and consumption. (…) The capitalists of a country which manages to capture foreign markets from other countries are able to increase their profits at the expense of the capitalists of the other countries”. You bet that sectoral balances are more than just an accounting identity! Look at how German capitalists have been successful at this game.

    9. dnm says:

      Imports are also considered to be a positive function of national income – so when national income rises we buy more locally- produced goods and more imported goods.

      Surely proportionally fewer?

    10. acorn says:

      The UK ONS has produced its version of the Flow of Funds as Chapter 13 of the Blue Book.

      I suppose someone must want to know such microscopic detail but I have no idea who! When Neil Wilson does his quarterly flow chart between the five basic sectors of the economy, it paints the picture of what Bill explains above. We need an “Office of Blue Book Explanation” for the little people.

    11. Ikonoclast says:

      While private lending does not increase net assets of the private sector, it clearly increases the volume of high powered money circulating in the economy. If, over an extended period, new lending continues to exceed repayments on existing lending then the volume of high powered money in the economy increases (all other things being equal). So the economy is getting “pump primed” in a sense but it’s kind of odd. It’s almost as if the economy is running on “empty calories”. The private sector has lots of money circulating but it has to net dis-save if the government has to run surpluses (as Howard did) to damp inflation. I am not sure what this would mean but my guess is it causes odd distortions in the economy. Is this one way to get high housing asset inflation with low headline (goods) inflation? (Which I think is unhealthy by the way and a distortion which hurts low income groups.)

    12. larry says:

      Neil, I understand the sectoral balances approach rather well, but I don’t think I understand what you are saying. Could you explicate it further?

    13. Neil Wilson says:

      It’s probably time to talk about the elephant in the room – the differentiation of the external sector from the domestic private sector.

      Once again this morning we’ve had Ann banging on about the current account deficit. Which she describes as “politically & economically unhinged as austerity. It’s equilibrium we’re after.”. No reason why at all.

      I see that as fixed exchange thinking. It misses the floating rate case that there is very little difference between somebody saving Sterling in Doncaster or Dubai. Both of those are entities are financially saving in Sterling and tied into the Sterling clearing mechanisms by virtue of the denominations of the assets they hold. Both are trading in the Sterling currency zone because the real output the produce or consume is bought and sold in the Sterling currency zone.

      The split between the external sector and the domestic sector is useful because we can pull the data from the national accounts. But what is the practical economic effect of it, and does the line lead to a twisted viewpoint that is no more helpful than seeing the spending cycle as ‘borrowing first’.

      Perhaps it is time to ask why what is effectively an the arbitrary artificial line in the analysis of floating rate systems is there at all?

      Why don’t we talk about currency zones – which dynamically grow and shrink as entities decide to trade real stuff in that zone, or decide against it.

    14. Marko says:

      The sectoral balances approach is all well and good as far as it goes , but it has nothing to say about the primary problem confronting countries like the U.S. If , over the last 30 years or so , the U.S. had shown a balanced external account , a private sector surplus running steadily at 3% of gdp , and a public sector deficit at 3% of gdp , while averaging 5% nominal gdp growth at low inflation , sectoral balance analysis would give the U.S. a gold star for performance.

      Meanwhile , during that 30-year span , the bottom 95% of the income distribution could have suffered from stagnant or falling wages while all income gains went to the top. Similarly , the wealth share of the bottom 95% could have largely shifted to the top as the 95% liquidated assets to try to maintain a decent standard of living. And , of course , the bottom 95% could have accumulated a horrendous overhang of debt – owed to the top 5% , naturally – until , finally , they’re tapped out , financially , emotionally , and otherwise , and just give up. The economy goes ” Poof ! “.

      That’s close to where we are in the U.S. today , and sectoral balances says not a whit about it. And no , moving from a 3% gov’t deficit to a 5 or 6% deficit won’t help , because the top 5% have captured the gov’t spending flows as well. It would amount to putting a band-aid on a sucking chest wound.

      So yes , it’s nice to keep the accounting in order , and the sectoral balance charts are interesting to study , but , boy , do they miss the real action in this economy.

    15. larry says:

      Marko, there is no need to balance each sector individually. This is not what sectoral balances accounting is about. And you are right that, if you want to know what is happening in detail in each sector, you have to drill down, providing you have the data. And current data does show that GDP benefits are going to the top “income” tier and that everyone else is getting shafted.

    16. larry says:

      Neil, I have no idea why Ann is still banging on about equilibria. She surely knows better. I don’t see why one can’t add currency zones to the sectoral balance analyses. The separation of the various sectors doesn’t appear to be arbitrary to me. Neither would a differentiation of currency zones, and I am not suggesting you made such a claim.

    17. Kingsley Lewis says:

      It is not clear to me from this post what are the special distinguishing features of the MMT “sectoral balances framework”.
      Prof. Mitchell recognises that the “accounting structures” that underpin the sectoral balances framework are embodied in National Accounts and that these alone do not provide any understanding of how the economy works.

      All valid macroeconomic models combine such “accounting structures” (true by definition)” with “theoretical propositions” (causal relationships). So if MMT’s “sectoral balances framework” has any special merits, these must stem from its “theoretical propositions” (causal relationships), and the analysis thereof.

      However the causal relationships identified here are very banal and elementary, namely:
      “consumption is determined positively by changes in disposable income”
      “Imports are also considered to be a positive function of national income”
      “We could add more complex theoretical propositions to explain private domestic investment, exports, government spending, and net foreign income transfers.”
      How is this anything more than an elementary Keynesian income-expenditure model under a new MMT banner?

    18. Adam K says:

      Dear Bill,

      Let me add something probably a bit controversial (I ask to be whacked if I am wrong). It is the presence of debt financed consumption and debt financed housing investment which slips under the radar (what has already been mentioned in the comments above).

      First let’s filter through misleading terminology (in the motorcycling sense).

      “The difference between income and use of income is net saving. This balancing item, net saving, is carried forward into the capital account as saving must be used to acquire financial or non-financial assets of one kind or another, or to reduce liabilities.” (ASNA 2.36)

      “The starting point of the capital account is net saving which is the balancing item of the income account. If net saving is positive it represents that part of disposable income that is not spent on consumption goods and services and must, therefore, be used to acquire non-financial or financial assets or to repay liabilities. If net saving is negative then final consumption exceeds disposable income which must be financed by disposing of assets or incurring liabilities. “ (ASNA 14.19)

      “The sectoral capital accounts are a disaggregation of the national capital account, and show the extent to which the sum of savings and capital transfers are used to finance the acquisition of non-financial assets. The balancing item, net lending/borrowing, reflects the net lending/borrowing of a particular sector to all other sectors. Net lending is the excess of capital finance for capital acquisition and measures the amount an institutional sector has available to finance other sectors. Net borrowing is the existence of a borrowing requirement to finance capital acquisitions due to an insufficient retention of financial resources through saving and capital transfers. ” (ASNA 2.40)

      “ The financial account records the net acquisitions of financial assets and liabilities. The financial account explains how net lending/borrowing is affected by means of changes in the holding of financial assets and liabilities. The sum of these changes, net change in financial position, is conceptually equal in magnitude to the net lending/borrowing item of the capital account. The financial account for each sector shows the financial transactions associated with the net lending transactions recorded in the capital account. ” (ASNA 2.42-2.43)

      So the financial flow which affects the state of financial capital account is “net lending” or “net borrowing” – in the case of accumulation of deposits in the banking system by the group of agents this falls into the category of “net lending to banks”. In the blog entry this is called “overall saving”. The case of accumulation of debt in the banking system by a group of agents falls into the category of “net borrowing from banks”.

      I would say that “net saving financing investment” which is definitely a form of spending has a completely different macroeconomic impact compared with “net saving financing net acquisition of financial assets” which is non-spending. To what extent net saving finances non-consumption spending or to what extent it leads to storing value in the form of financial assets is determined by agents as a part of portfolio allocation process.

      What slips under the radar in the National Accounts framework is lending / saving activity of the separate groups of private sector agents. If we aggregate habitual borrowers and habitual savers-overall into one group of “private sector agents” lending-to-banks and borrowing-from-banks does not cancel each other despite the fact that aggregate position of the whole sector doesn’t change. It is obvious that in the era of financialisation rich people accumulate real and financial assets and medium-income people accumulate debt (mainly mortgage debt in Australia) – see Graph 2 (assets) , Graph 9 (debt) “The Distribution of Household Wealth in Australia: Evidence from the 2010 HILDA Survey, Richard Finlay RBA Bulletin – March Quarter 2012”

      We know that saving in the form of bank deposits is not needed for banks to lend money out (it is actually the other way around). We also know that banks are not intermediaries between savers (in the financial assets sense) and borrowers. Banks interacting with agents are capable of creating or destroying spending power. The derivative of the stock of debt is the value of debt-financed flow contributing to GDP. The new spending power is then stored by savers in the form of financial assets, since not all extra income is saved a spending multiplier greater than one is present. Since savers do not ask who and why injected extra spending to the economy (whether it is a result of trade surplus, budget deficit or other agents private sector leveraging) we can assume that their response to the extra leveraging in in the short term perspective, a stationary (not changing much in time) function of increased income. Of course spending decisions are affected by overall business climate which is great during boom times.

      Extra spending financed by borrowing during one of many housing booms in Australia has (or maybe had) the same stimulatory effect as increased discretionary government spending. This is totally invisible if we look at saving and investment flows at the macro level. During the leveraging phase saving propensity of the private sector has decreased and government sector was able to run a surplus but these are just artefacts. We are left with a high level of debt, prone as a society to the same instability which affected USA and some European countries during the GFC.

      “Household saving – or the amount of household disposable income not spent on the consumption of goods and services – trended lower as a ratio to GDP up until the mid 2000s. The trend decline in household saving, and possible explanations for this change in household behaviour, has been widely documented (Edey and Gower 2000; Hiebert 2006). One factor that contributed to the decline in household saving during the 1980s and 1990s was the deregulation of the financial sector in the 1980s, which removed restrictions on households’ access to finance, allowing them to increase their borrowing. Households used this debt to finance house purchases and (to a lesser extent) financial assets. Hiebert (2006) notes that the relaxation of credit constraints and subsequent run-up in debt allowed households to smooth consumption and reduce saving. This effect is only present while households make the transition to higher levels of debt.”
      see “Trends in National Saving and Investment James Bishop and Natasha Cassidy RBA Bulletin March Quarter 2012”

      Maybe – just maybe – instead of (or on top of) pumping more and more money in the form of increased budget deficits, the correct long-term solution to the negative trend called financialisation and the unstoppable growth of the wealth of “the 0.1%” is the denial of opportunity to increase the level of financial assets held by the richest group of the society. Dismantling the superannuation scam with all its tax loopholes would also help. What about imposing a tax on stock of wealth (especially financial assets), not to finance government spending but to force the richest to spend money on goods and services provided by the less fortunate, these who have to work but cannot find jobs? This policy could coexist with Job Guarantee which I fully support.

      I would argue that the current approach to describing the economy in National Accounts statistics very thoroughly hides these fundamentally relevant phenomena but it is obviously better than the enlightened (…) presented by these economists who advise the Hard Labour party in the UK.

      BTW Would it be possible to pay back (some of) the public and private debt at the same time? Yes but only if people who have significant financial assets are persuaded to liquidate them and spend. This would be enough to pay back some of the debt without lowering the aggregate demand. This may happen at some point in the future when the number of pensioners significantly exceeds the number of younger people – but this is not how the economy works in 2015 in Australia.

    19. jake says:


      I agree-“but here we are to assume that ultimately all income generated goes back to households (after all of the are distributions made)”

      Perphaps this is the case,but recurring recessions indicate that the top 1% is hoovering up the greater proportion of all of the income in the form of bank interest and profits,where as a diminishing amount of the income goes towards lower wages.
      Draining demand and boosting asset prices (not a flow BTW) as the 1% replow their (un)earnt income into claims on productive wealth and see huge capital gains.Which further drain demand on productive goods and services as they try to meet rent costs and/or service debt ,which funnels money back up to the 1% again.

      I think within sectoral balances,the income flows that go towards the financial sector and/or different income stratas need to be analysed as well,inside the private sector section.We need spending power distributed equally across the population inorder to ensure macroeconomic stability and maintain sufficient demand to ensure higher employment rates.

      Otherwise we could miss the picture described by marko

    20. Neil Wilson says:

      “The separation of the various sectors doesn’t appear to be arbitrary to me.”

      When you start digging down into the systemics of business structures in the modern world the hard line at a political boundary seems increasingly arbitrary. What we need to understand is exactly what is the difference between an entity in Doncaster and an entity in Dubai once you take into account the multiple currency zones such entities will be operating in, the free movement of capital and that fact that those entities tend to be corporate bodies and trusts rather than individuals.

      Sterling to a foreign entity has to pass through the UK clearing system both in and out before it can affect the UK economy – because of the public monopoly effect of the currency.

      I’m suggesting that the magic of being a foreign entity is considerably less significant than those people arguing against ‘current account deficits’ believe. Because of the way floating rate exchange works and how that therefore generates a dynamic size of currency zones in terms of participating entities.

      The more I look for differences between the external and private sector the less I find. The arguments seem mostly historic looking back at a time when capital flowed less freely and the nature of taxation was completely different to what it is today.

    21. dnm says:


      Maybe you could answer the question that I have already asked a couple of times without ever getting a (comprehensible) response: what is capital flight given that currencies are non-convertible, and as you say the distinction between external and private sectors is meaningless?

    22. larry says:

      Neil, I think you may be conflating indeterminacy with arbitrariness. I would agree that the deeper one goes down the rabbit hole, the less determinate things become. This doesn’t make the original distinction essentially arbitrary or meaningless. It also doesn’t make the issue you highlight go away either. And I would agree with you about the goodness or badness of currency accounts being meaningless. From a sectoral balances account, current accounts are just another sector, neither good nor bad. There may be real consequences whether the accounts are in surplus or deficit, but this depends on what is going on, and the impacts this will have on the other sectors. In and of itself, it is neither here nor there.

      dnm, surely currencies are convertible, as you would find at almost every Bureau de Change in the world. By “capital flight” is usually meant the movement of money from one currency jurisdiction to another, say, from Greece to the UK, where one currency will be converted into another. I think Neil is implying that if I have Sterling in my Greek bank account, for whatever reason, and I send it out of Greece to a bank in the UK, what meaning does the standard currency jurisdiction possess in this case, particularly as no currency conversion takes place. I think it is fair to say that this situation does not apply to most people. I would agree that this grey area poses a theoretical problem, though I would expect not an insuperable one.

    23. larry says:

      There seems to me to be some confusion about the theoretical/explanatory role played by the sectoral balances accounting framework in MMT. Sectoral balances do not in themselves possess any economic explanatory role. But they play an important role in certain kinds of macroeconomic explanations. For instance, if a government decides to go for an economic surplus, a sectoral balance accounting framework incorporated into a decent macroeconomic theory should show how and why the private sector will be forced into deficit, other things being equal. Accounting principles themselves play no explanatory role in understanding why this is happening. But they will form part of a macroeconomic theory that should be able to explain how and why the sectoral balances are reacting in the way they are and what this means. That is, they form an essential part of a macroeconomic explanation.

      There are a number of ways such accounting principles can be incorporated into an economic theoretical framework. How this is carried out depends on many factors. What these are is of no moment in this context. What does matter is that they are so incorporated and contribute significantly to macroeconomic explanations of real economic events.

    24. Neil Wilson says:

      “surely currencies are convertible, as you would find at almost every Bureau de Change in the world.”


      It’s very important to differentiate. Convertibility means that one currency is *destroyed* and a different currency issued from stock by the central bank. That’s how pegged currencies work – you can convert at a fixed rate, which means that you can hand over once currency and get another in return. You can convert the deposits in your bank account into paper money. Once you have the paper money from the bank’s stock, your deposits have been deleted and the bank’s balance sheet has changed.

      In a floating rate there is no destruction, just an exchange. So the teller takes your Sterling and issues USD. There is no movement in the balance sheet from the exchange.

    25. larry says:

      Neil, I wasn’t thinking of pegged currencies. I was speaking in general. It wasn’t clear, to me at least, that you were restricting the situation to pegged currencies.

      In any case, I really don’t see a substantial difference between them. In a fixed rate regime, the conversion is at a fixed rate for a period of time. In a flexible rate regime, the rate could change overnight. Why would one currency be “destroyed” in the first instance and not the second? In saying this, I am equating a fixed rate regime with a pegged rate one. If there is a difference, I am not clear what it is.

    26. Neil Wilson says:

      “what is capital flight given that currencies are non-convertible”

      You can’t have classic capital flight in a floating rate system. It is a meaningless concept.

      All you have is some people selling and other people buying. Those that are buying may or may not be getting a bargain and those that are selling may or may not be losing money – and they might run out of market liquidity before they can sell at all.

      So what you get is a price change and a redistribution based upon that. And if some entities permanently ‘leave’ a currency area then the currency area shrinks – potentially within the political boundaries of the state issuing the currency (which is what dollarisation is).

      Current account balances and capital flight are really fixed exchange rate ideas. They have a different effect in a floating rate system and I’m not sure we’re really clear what that is.

      The problem as I see it is that we have a floating rate system being managed and regulated by control points and notions that were designed for fixed exchange rate structures. The containment system is still stuck in a Bretton Woods mindset and the traders who actually understand what is going on are able to run rings around them.

      But nobody seems to want to discuss the issue. Instead they retreat to their religious texts and hide behind aggregations and assumptions.

    27. Neil Wilson says:

      “Why would one currency be “destroyed” in the first instance and not the second?”

      Because that’s the difference between ‘conversion’ and exchange. In conversion the supply of the liability shrinks. So the Bristol pound is deleted when the UK pound is issued. The UK pound is deleted when the pound of sterling silver is issued in a metallic system. The Barclays bank deposit is deleted when the £20 note is drawn from the ATm. That is what conversion is.

      Exchange is different. There is no deletion. When you exchange USD for GBP at the desk, the USD stays in circulation. It becomes the assets of the desk.

      That’s why the price floats, because the quantity is fixed. If the price stays the same the quantity has to adjust.

    28. larry says:

      Addendum: Neil, in equating a fixed rate regime with a pegged rate regime, I am assuming that convertibility occurs similarly in each one. I am also assuming that the same is true for a flexible exchange rate regime. In other words, some kind of currency convertibility takes place in each. I don’t see any need for “destruction”, only balance sheet adjustments. I can see a problem in accounting for what is “exchanged”, especially in a fixed exchange rate system. But isn’t that the case whenever one currency is “exchanged” for another?

    29. larry says:

      Neil, I now see what you are getting at. But I am not certain I agree with what I think you are contending physically takes place. I can see your distinction between conversion and exchange, but they both seem to me to be balance sheet exercises fundamentally, though operating differently.

    30. José Guilherme Ataíde says:

      Dear Bill,

      Excellent post!

      I’d just like to suggest – for the sake of completeness – the addition of one item, that I believe is missing in the accounting identities.

      The Current Account Balance (CAB) also includes transfers – that is, flows that are not part of GNP, such as remittances from emigrants working in foreign countries.

      Using IMF terminology, such flows compose the “Secondary Income Balance” (SIB), whereas what this post calls net external income flows (FNI) is usually referred to in IMF statistics as constituting the “Primary Income Balance” (PIB).

      Adding the SIB to GNP, we get GNDI – Gross National Disposable Income.

      We should thus define the full Current Account Balance as:

      CAB = (X – M) + PIB + SIB

      Or, if we stick to the terminology of this post:

      CAB = (X – M) + FNI + SIB


      GNDI = GNP + SIB = C + I + G + CAB

      I hope this may be useful, considering that IMF terminology is being adopted everywhere in the world..

    31. bill says:

      Dear Kingsley Lewis (at 2015/11/24 at 22:32)

      I didn’t say the post was about any “special distinguishing features of the MMT ‘sectoral balances framework'” – your nitpicking deliberately avoids the intent of the post to indicate that underlying the framework there must be a theoretical structure.

      Further, the blog was not intended to be a book on macroeconomic theory. I used the linear-expenditure example to demonstrate how theory links to the balances.

      best wishes

    32. Lyle says:

      RE: the government sector “comprised all levels of government and their agencies”.

      Only the sovereign level of government can be a currency issuer and add money. The other government levels are users. Accounting-wise, does this cause a problem when a user, even though a government entity, is grouped with the issuer? How can the net expenditures of a government user of the currency add to economy in the same way as the issuer? Would not a user government level expenditure, like a private one, simply move money within the domestic sector, albeit achieving the public purpose in the process rather than a private purpose?

      Would not the results vary depending on the amount of non-sovereign government entities within a nation. The US, for instance, has a lot of currency-user-level government compared to Britain (at least that’s my understanding).

      Could you sometime address the difference between where the expenditures originate vs where they end up? There seems to be a common idea that government simply sucks taxes and that they simply end up in a hole. In reality, don’t most go directly into the private sector as wages and contract purchases? So, the question is, aren’t government employees and contractors rightly considered as the private sector?

    33. mahaish says:

      “Perhaps it is time to ask why what is effectively an the arbitrary artificial line in the analysis of floating rate systems is there at all?”

      the line in the sand is the deposit flows in and out of the domestic banking system, and the balance sheet effects on the domestic banking system in terms of liquidity composition, both inside and outside the broad money supply, i would presume.

      so it kind of doesnt matter how many US dollars are held out side of the federal reserve system , its the balance sheet effects domestically the financial flows have that matter from a sectoral balances point of view, i would presume

      always great reading your posts bill, and neil

    34. larry says:

      Neil, while I agree that the tendency is to look at the economic system by many as one where a fixed exchange rate system is operative, I don’t see the link between capital flight and fixed rates. Surely, it is possible for such a system’s currency to either tank or soar in value. If I and my other billionaire friends happen to “know” that the former is going to take place, we can move our money somewhere else where the currency system is more stable, even though it, too, floats against other currencies. This is still capital flight even though it is taking place in a floating exchange rate set of systems. Such flight could take place under either system, and has done so historically. We can restrict our terminological usage as you suggest, but, in this case, I feel I feel such a restriction would mislead more than help.

    35. larry says:

      Lyle, taxes are taken out of the monetary circuit never to return – you could say they end up in a hole. They are not given to contractors or anyone else. Expenditure is, as Bernanke admitted to Congress, created out of thin air by computer keystrokes.

    36. larry says:

      Lyle, a government employee and a government contractor have different fiduciary relationships to the government, which is paying both of them. One is an employee while the other, strictly speaking, is not. A government contractor is not a government employee even though the government funds the contractor out of which its employees take their salaries. This is the case even when the contractor is a single person. Clarity on this issue isn’t helped by the vagueness of natural language, to wit: “I work for the government”, which I have heard contractors say when, strictly speaking, they don’t.

    37. A Luta Continua says:

      I see that at 6:33am on 29 October Ann Pettifor posted the tweet, referred to by Bill, in which she says she is ‘not comfortable’ with sectoral balances. Yet at 11:00am on the same day she posts another tweet in which she uses sectoral balances to show that corporations are ‘not hoarding cash’. So, it seems that sectoral balances are not much use to economists unless they need them to make a point.

      The second tweet includes a chart that she attributes to Frances Coppola. Interestingly, Pettifor does not link directly to the article that Coppola wrote. I suspect that this is because Coppola begins it with the words ‘I do like sectoral balances…’ and goes on the enthuse about their usefulness to economics.

      [Bit of an aside: Weirdly, Pettifor doesn’t use the same chart as Coppola or the latest data. Pettifor’s is quite out of date, being from the Office for Budget Responsibility’s Economic and Fiscal Outlook – December 2014 [PDF], Coppola uses the March 2015 version and the latest available is July 2015. The latest shows the corporate sector much more in deficit than the one Pettifor chose.]

      As for the ‘hoarding cash’ bit, the latest OBR chart does show that the corporate sector is dis-saving and will continue to do so for the remainder of this parliament. But, hang on, in John McDonnell’s recent speech [PDF] on the ‘New Economics’ wasn’t one of the main ideas that Labour will tap into this hoard? Specifically, McDonnell says:

      …our major corporations, despite record profits, are sitting on vast cash piles. At least £400bn is held in corporate bank accounts – money that should be invested…
      …we would look to change our corporate tax system to give companies incentives to invest wisely.
      A higher tax on retained earnings should be investigated…

      Pettifor, an adviser sitting on Labour’s Economic Advisory Committee, seems to be directly contradicting the man she is supposed to be helping. Did she make McDonnell aware of the corporate sector figures in the three weeks between posting the tweet and him making the speech? Or am I not understanding something, i.e is the £400bn not reflected in the sectoral balances?

      As Bill notes, both Pettifor and Tily are making it much harder for Labour to counter the neo-liberal agenda pushed by the Tories. If McDonnell were to bring up sectoral balances now, Osborne can dismiss the concept with ease: ‘Your own advisers don’t agree with your crazy ideas! Even the TUC thinks they are nonsense!’

    38. Jerry Brown says:

      Lyle, I have the same question about where state and local governments should be placed in the sectoral framework. They are users of the currency and taxes they collect do not disappear, they are used to fund spending by these governments, at least in my understanding. I don’t know where they get accounted for in MMT. But I want to learn that also.

    39. larry says:

      A luta continua, thanks for elaborating on what Pettifor and Tily are doing. I thought I knew what Pettifor was doing, but given your data, I am now not so sure. I think McDonnell is floundering. He has made some rather bad decisions since becoming Shadow Chancellor. And it seems, to me at least, that he may well be relying on the wrong people for economic advice, like Pettifor and Varoufakis. It is way to early for McDonnell to begin talking about sectoral balances. He hasn’t laid the groundwork for it. And that is a problem. He hasn’t begun laying the groundwork for traveling down the MMT route much if at all, which is the really only viable route for him and the others to go down. Neither he nor Corbyn have given any indication, for instance, that they get the idea that taxation does not pay for government expenditure. And this is pretty basic. Even astute members of the public are cottoning onto this. This is not the time for tunnel vision, as it were.

      And this is not the time to be taxing corporations and small businesses, particularly the latter. The companies need the money more than McDonnell does. But if he is into redistribution, as his speech suggests, then that is a good sign. But we must notice that the focus is on taxation, I think for the wrong reasons in part. The clue I think may be in this passage: “any fiscal rule should ensure government’s current spending is brought into sensible balance, consistent with sustainable economic growth, whilst allowing vital investment to continue”, which indicates to me budget balancing over the fiscal cycle. Unnecessary and counterproductive. Also there is the notion that the drive and financing will come from the private sector.

      A lot of good stuff, but mostly oriented toward removing the egregious encrustations that the Tories have built, with nothing at all on fiscal policy, such as government led job creation, something FDR did around 80 years ago.

      Jerry Brown, both state and local governments go into the government sector in a sectoral balances accounting framework. They are part of the large modern public sector that Osborne seems intent on dissecting into dysfunctional units to flog off to his friends in the upper tiers of the private sector. And not just to UK interested parties. Americans will do, too.

      I have a feeling that we may experience an Obama moment. Initial great expectations followed inexorably by grave disappointment. As neither Corbyn nor McDonnell are Obama and thereby saddled with his conservative proclivities, it doesn’t need to turn out that way. But I am afraid it just might. However, on the bright side, we have a test being placed in front of them today. Maybe they will pass.

    40. larry says:

      A luta continua, your aside is ominously pertinent as it suggests to me that all may not be well in the McDonnell camp. As an aside, Tily wrote a dissertation on Keynes, which he turned into a book, under the supervision of Victoria Chick, the only Keynesian in the UCL neoclassical stronghold. A dreadful place. If I remember rightly, before that, he used to work for the ONS. Tily is an acolyte of Pettifor, who is a friend of Chick’s, and Chick and Pettifor together published a piece in February of 2011 critiquing Osborne’s policies, entitled “The Economic Consequences of Mr Osborne” (PRIME).

    41. larry says:

      Addendum: In 2014, Pettifor, wrote a short book entitled “Just Money: How Society Can Break the Despotic Power of Finance”.

    42. Lyle says:


      Thanks for the reply about “taxes ending up in a hole”. I spoke poorly on that. I realize that “taxes destroy money”, as MMT says which, as you say, IS a hole. I meant that from the point of non-MMT perspective in which taxes are required before expenditure. instead of doing what we want from those taxes collected they actually speak of taxes going into a metaphorical black hole. MMT’s “taxes destroy money” hole just is the way it actually works — it’s not value laden. Non-MMT sees that as a metaphor for waste and government a a parasite on the private sector. In fact I heard such garbage from my own Congressman today while railing about the federal government, of which he’s a part — “we send them $100 and they spend $140” or some nonsense.

    43. larry says:

      As for McDonnell’s EAC, some of the appointments could perhaps have been bettered and he will have to be careful with the advice from some. Let me mention Piketty first. Great recent data, poor argument. And his solution to the financial crisis we are experiencing is based on taxation. Much if not all of his arguments in the book are neoclassical in character; while he is a passionate advocate of removing economic inequality, a potential problem lies in his putative solution. Not the best appointment perhaps. Pettifor and Tily have critiqued Piketty’s book, contending [rightly] that the ancient data he relies on to show certain trends are dubious and [probably wrongly] that his explanations are deterministic, something he denies early on in the book; this latter point of theirs I have critiqued myself, as the evidence for it is rather slender. Blanchflower is on the committee I would guess because of his BoE experience and because of his unrelenting critiques of Osborne’s policies.

      What does this show about McDonnell, or McDonnell and Corbyn’s, judgment? It shows I think at best that it is uneven and possibly riven with inconsistency. It is one thing to be a broad church and to let it all hang out. It is another, however, to give the impression that you are not sure how to get to where you appear to want to go.

    44. Lyle says:


      A second thank you for your clarifying comment about the difference between a government employee and a contractor. Point taken. Again, my comment may not be valid or well stated. People tend to conflate an expenditure with the collection of an asset in return and that the two (expenditure and asset collection) remain in the same sector. When it comes to the government, the “stuff” the expenditures purchase is human resource or products that become part of public service or ownership: a road, a tank, a park…. If the money expended pays for wages directly or indirectly through contractors, are not all those employees or contractors who make profits providing goods or services rightly considered within the private sector? It seems that people opposed to public employment somehow conflate the origin of the wages (the government sector) with the destination sector of those wages — that public employees are somehow also in the government sector. Since the government sector does not actually “have” financial assets after collection, the only assets it can have on behalf of the public are real assets of various kinds. It cannot “have” human assets. It can only buy their services from the private sector of which they will always be a part.

    45. larry says:

      Lyle, thank you for the clarification. Yes, the US congress is filled with non-MMT personnel and even worse characters running for president. OMG!

    46. larry says:

      Lyle, one of the reasons I see that the general public are hostile to the public sector in this environment is partly because they buy into the fallacious argument that their taxes pay public sector workers’ salaries. And that these jobs are a sinecure and too highly paid. Some research has been done on public service employees in the UK and one finding was that public service employees were generally more highly qualified than employees in the private sector. Since the GFC, this relationship has become much more complex.

      You are right that Osborne has given work that should be done by public sector employees to the private sector. One major consequence of this is that the quality of the work has deteriorated. Another consequence is that the private sector discovers that they can’t do the work and bow out. The more time it takes for this to happen, the greater the possibility that the skill in question will be lost, at least in the domestic population.

    47. larry says:

      Lyle, I neglected to say: you are welcome. Glad to help.

    48. dnm says:


      Sorry for the late comment, but thanks for your response. I’m encouraged that your reply accords with my own (very limited) understanding of the matter. Unfortunately, I wasn’t very precise with my question, which explains in part Larry’s confusion. I should have included pegged currencies along with convertible currencies. Of course for floating currencies, all the action takes place in exchange rates.

    49. bill says:

      Dear José Guilherme Ataíde (at 2015/11/25 at 5:!2)

      Yes, a good point. Thanks.

      best wishes

    50. /L says:

      Why isn’t Pettifor comfortable with Sectoral Balances? Is it that its not “economics” or something wrong whit the concept? If accounting isn’t economics it’s for sure closely related, and a system to verify the result of economic concepts.
      It’s like if you aren’t knowledgeable in basic Newtonian principles how could you laborate with tangible physical reality. I suppose as political economic advisor it’s about tangible economic reality and not solely about the “reality” in lofty economic models.

    51. Neil Wilson says:

      ” Surely, it is possible for such a system’s currency to either tank or soar in value.”

      Only to the extent that there is liquidity to allow you to do that in the system. Ad absurdum if everybody wants to sell, then nobody wants to buy and you can’t sell. You are stuck where you are until you can find a buyer. That makes the system naturally self limiting based upon the liquidity levels.

      So there is no flight. Just a change of name tags. The quantity of money and therefore capital stays the same. Plus of course there is whatever money is required via the banks and the government.

      I really don’t care if all the Chinese do ‘capital flight’ and sell their London homes and then sell the money. The homes will still be in London and available cheaper to somebody else and the money will still be Sterling available to whoever took advantage of the bargain.

      Floating rates float, but they only move wildly if there is a patsy in the system supplying the liquidity at any price and nothing slowing the transaction speed down. Hence my point about the system being managed by inappropriate techniques.

    52. Neil Wilson says:

      “We can restrict our terminological usage as you suggest, but, in this case, I feel I feel such a restriction would mislead more than help.”

      The use of the term ‘capital flight’ is designed to scare people. That is the sole purpose of it. And since it is possible to dismiss the idea as inapplicable in the floating rate system we should do so.

      All the terminology within the economic sphere is twisted wilfully to scare and frighten. None of it has any concrete definitions. They are all humpty dumpty words.

    53. Stephen Ferguson says:

      Many thanks for the post.

      In a way the discussion has come full circle as Ann’s tweet (and I suspect Tily’s blog post too) was prompted by David Graeber’s recent Guardian article “Britain is heading for another 2008 crash: here’s why”, which you will recall lifted graphs produced by your own good self and Neil Wilson.

      Just curious, did you read Tily’s other 2 posts on sectoral balances? See here…



    54. dnm says:


      The use of the term ‘capital flight’ is designed to scare people. That is the sole purpose of it. And since it is possible to dismiss the idea as inapplicable in the floating rate system we should do so.

      So the word is confusing. But that doesn’t mean that it doesn’t correspond to real phenomena. Take this sentence lifted from one of Bill’s recent posts:

      “Euro area residents are sending their savings abroad and buying foreign financial assets,”

      Which sounds a lot like what most people would call capital flight. But unless people are literally buying gold (or rolexes or whatever) and shipping across the seas, then there must be a countervailing activity by foreign (non-Euro) residents. It’s a transaction, with (at least) two parties. That’s what I’m currently failing to understand.

      With respect to Europe, I recall that the Eurozone is currently running a surplus with the rest of the world, so it could be a typical mercantalist ploy of acquiring foreign receipts and not converting these back to domestic currency. Or it could be some high jinx with offshore funds moving assets nominally from the domestic to the external sector.

    55. Derek R says:

      It amazes me that sectoral balance techniques should be controversial. The technique is used in the fluid mechanics and thermodynamics spheres where it is known as Control Volume Analysis and in engineering where it forms the basis of Finite Element Analysis. If people really want to treat economic analysis in a more rigorous and scientific manner, they have to treat the accounting of debt and money as seriously as the physical sciences treat the accounting of energy and momentum, and of forces and deformations. Sectoral balance analysis of debt, money and resources is the way to do that.

    56. mahaish says:

      im sure most of the bloggers on this site have come across this before, but below is a link to scott fulwillers excellent piece on sectoral balances in a more dynamic perspective


    57. Stephen Ferguson says:


      Thanks for link. Scott’s use of diagrams should be encouraged as these, at least in principle, bring both clarity and formality to his description. The confusion over terminology in the comments above demonstrates all too clearly the shortcomings of informal natural language in such a highly technical topic. Using English in this setting results in people being confused and talking at cross purposes.

      Bill recently mentioned in a blog post that one of his research grant proposals had been accepted, which, intriguingly, one of the commenters expressed their hope that the research in question was related to ‘graphics’. As someone who models software behaviour using a formal graphical language, I believe MMT would hugely benefit hugely from any such development.

    58. Dirk Ehnts says:


      I have recently created a model building on FoF and sectoral accounting. Nothing fancy, just flows and few behavioral equations that are not disputed (consumption and imports depend on income). One can get quite far with this model, and it is a nice replacement of the IS/LM model. Here is the link:



    59. jeff says:

      if the the net financial possession of the private domestic sector decrease. How did households respond to this change in net financial assets? What types of actions did they do?

      Please help me out with that question

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