The sectoral balances identity is derived from two equations, one which gives the GDP calculated by summing the income from sources, and the other which calculates GDP by summing the uses to which the GDP is put. By setting two expressions of GDP equal we have an identity, that is, an equation that holds no matter what happens in the economy. It is called the Sectoral Balances Identity, given below..
(S - I) =* (G - T) + (X - M)
This identity says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.
All these relationships (equations) hold as mathematical identities of accounting and not as matters of opinion or theory.
At click here we find the following chart. The Foreign Sector should be a graph of (X-M). However, it is instead, -(X-M).
At any year (on the abcissa) the graph gives the Private Sector balance, (S - I), the Government Sector balance, (G - T), and the negative of the Foreign Sector balance, (X - M).
You can see that the relationship between the three sectors is consistent with the identity. That is, at any time the levels of the Private sector, the Government sector, and the Foreign sector seem (by eyeball estimate) to obey the identity.
Sectoral Balances of the US Economy 1990-2015 (FED Database)
In the run-up to the 2008 crash this graph shows that the private sector was in deficit (negative) for about 5 years. But look at what happened when Paulson and Bernanke told President G.W. Bush on September 18 that if the government didn't bail out the bankrupt Wall Street banksters immediately, the economy would crash.
There was a sudden huge government expense, and simultaneously a sudden rise in the Private Sector balance. But wait! We know that there was no windfall on Main Street, so what was going on?
Note that the Foreign Sector is plotted from the foreign perspective, i.e., incorrectly. It is positive if the US is in deficit. That said, this graph is remarkable. It says that the Private Sector was in surplus as a result of the 2008 real estate crash. Actually Main Street was in deficit in 2008 more than it was in 2007 before the crash, because qualitatively there was no improvement in Main Street income during that year. So what is going on in the graph?
The answer is: the official NIPA data includes ALL sources of income including the income of the Wall Street investment banks and that of their employees and officers. When both income from commercial activity and income from rentier activity is counted, and the expense of the government in bailing out the Wall Street crooks is included in the Government sector figures, the Sectoral Balance identity still holds, BUT it no longer represents the REAL economy exclusively. (This is unacceptable because the Sectoral Balance graph should be used to regulate* funding of a REAL economy Employer of Last Resort (ELR) program based on the REAL economy Private Sector balance.)
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This graph, when understood, proves several things:
The government instantly created trillions of new dollars to bail out the banksters in September 2008.
They continued to create and transfer trillions from then until sometime in 2013.
They knew what the banksters were doing with the windfall for sure, because the money kept showing up in the income of the Private sector year after year.
The total amount created and transferred in this period was about $26+ trillion.
The government was complicit in trying to hide this disaster from the public because various explanations, all lies, were floated-- a) it was short term loans all paid back, b) the foreclosed homes were accepted by the government as part of the repayment c) it's no big deal that the people who were suckered into taking on the huge mortgages lost everything and were totally forgotten.
Since nothing was done to rein in the banksters, the appraisers, and the real estate boomers, another bubble is now in the works.
OK. End of rant.
* The regulation is done by adjusting the spending in the ELR program yearly to keep the Private sector balance near zero. The theory is that in the real economy a negative Private sector balance indicates that there is not enough labor income to consume the GDP, and this implies too much unemployment. The ELR program employs anyone who cannot find work. The labor pay rate is less than the going market rate but enough to provide a living.
I am a retired physicist and hold a B.S. in Ch. E. as well. I have been an environmental activist since the early 1970s. I was a founding member of the Save Barton Creek Association in Austin, TX. In 2006 I was a member of a select committee (more...)