Here is a good conspiracy with the redeeming feature that it does not involve a premise that the public sector is both hugely incompetent and master manipulators of all things. (h/t client). I suspect that conventional macro is blinded to a very simple point by its extreme disregard for Modern Monetary Theory (MMT). The disregard seems well founded, in the sense that the main claims and policy recommendations of MMT are dangerously misguided. And separately, some of the thirstier acolytes within MMT are fraudulent even in their application of MMT. The only constraint on fiscal expansion is inflation! And then when inflation soars, look, a land shark!
Anyhow, given that MMT likes to obsess over accounting identities, any self-respecting economist from the conventional school takes it as a point of pride to understand neither the T accounts in banking nor the accounting identities in the National Accounts. This largely explains the earlier acceptance of the nonsense “excess savings stock’ thesis, which claimed that the flow of financial saving was depressed by a desire to run down the stock of savings accumulated during the peak of the fiscal expansion. SMH. I keep waiting to say that at least they have recently all gone crickets on that. But the problem in making such a claim is that it would be false. Even some intelligent people still go on about excess savings getting run down. (By the way, do click and go to 34:00. It is charming.)
I don’t want to jump the gun, like AJ Ayer
Source: Linked above
With the second revision to the fourth quarter GDP accounts, we now have hard data on the public sector financial balance and the national accounts measure of the external balance. Accordingly, we can calculate the implied financial balance of the domestic private sector. As you can see from the chart above, it ticked down meaningfully during the fourth quarter, entirely because the fiscal deficit narrowed from its extreme reading during the third quarter. However, there is no evidence that the private sector on balance has been running down its financial savings. Indeed, the pace of financial saving remains somewhat elevated by historical standards. It would be hard for it to be otherwise, given the size of the fiscal deficit and the empirical tendency of large-economy external balances not to blow out dramatically. And while MMT is wrong to think of accounting identities as the whole answer, they are demanding task masters.
The practical implication of the still large private sector financial balance is that it tilts sharply lower the odds that the private sector might have become financially overextended. The flip side of this is that the public sector has been moving deeper into debt. But at this point the public sector is widely and correctly believed to be money good, so this distribution is very probably net stabilizing and net stimulative – at any given level of interest rates. Or to put it another way, it probably raises r* and makes the business cycle less volatile. That is not to say it is “good,” but it is presumably what most immediately interests us during business hours.
Overall private sector at least is “running down savings”
Source: BEA, NBER, FH calculations
Data are actual to Q4. Wild swings during the immediate Covid period are censored from the right panel of the chart, to avoid distraction.
There is a caveat here, though. The main accounting identity referenced here has the overall private sector financial balance on its left side. And the personal saving rate differs from that in two ways. First, the saving rate is a component of the household sector financial balance. And conceptually that can be thought of as the private sector financial balance less the business sector balance, which is itself quite variable. Second, the excess saving story relates to the personal saving rate, rather than the household sector financial balance, although incoherently. The difference there is household sector investment in residential structures or “housing.” And it is true that, as measured at least, the personal saving rate has quite recently become somewhat depressed. This development is not particularly dangerous, as residential investment is also somewhat depressed, which means the household sector financial balance is not in a major deficit. And the low personal saving rate, assuming it is even measured correctly, is easily justified by elevated household sector wealth.
Perhaps that is more detail than you need. There is not actually a lot of “news” on this theme from this morning’s GDP release. Rather, we just got confirmation of an existing theme. The overall private sector, including the household sector, would seem not to be overextended in aggregate, either on a stock or flow basis.
[1] The Financial Accounts of the United States show the household sector to be in a healthy financial surplus, but there is noise in those measures. We may be more confident in the overall private sector financial balance than its distribution across the household and business sectors. Indeed, the figures do not even sum up even roughly in the official data.
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