Why is the Private Sector Underreporting its Savings?
Interesting article here in the FT Blog about how the Private Sector must be under reporting their Surplus.
The blog post makes a hash of it, but the UBs economist George Magnus seems to know the Balance sheet stuff cold, even if he won’t let on that he knows other ways to think about our favorite equation, I = S + (G-T) + (N-X). He even drops serious and repeated Minsky references – how can he not know his Randall Wray and Billy Mitchell?
Magnus points out that the private sector “must” be underreporting its savings, because they don’t add up with other known numbers:
“The data, through Q3:2010, reveal that the surge in the government deficit to 10% GDP is basically the counterpart of the continuing surplus earned by foreigners (in effect, the current account position), and the sharp turnaround from deficit to surplus in the household and non-financial corporate sectors. Put another way, private sector deleveraging has been accommodated without traumatic damage to the economy by the government’s willingness to borrow (temporarily) on its behalf.
This much is self-evident to people familiar with the balance sheet approach to booms and busts. But now it gets a bit more interesting, because the Fed’s data don’t add up properly any more. Chart 1 shows that the private sector surplus last year was running at about 5% of GDP. If we use commercial bank data to estimate the net financial investment of the sector, the private sector surplus would be about 3.5% GDP. Now go figure. Even adding in the overseas surplus, how does this square with government borrowing of 10% of GDP?
The answer is that there appears to chronic under-reporting of the private sector surplus. So, look at Chart 2, where the solid line is the private sector financial balance as reported in the Flow of Funds, but the dashed line is the private sector as a residual, calculated as the government plus the overseas balance. Mostly, these two series are in the same ballpark – until the financial crisis. To make the flow of funds data balance as they should, the private sector surplus ‘needs’ to be a lot closer to 8.5% of GDP, which is 3.5% GDP larger than officially stated, and 5% GDP larger allowing for the inclusion of financial institutions.”
This is serious stuff – what is going on? I don’t have any good ideas yet. MMTer’s out there – any ideas?