To understand what is going on you have to look at data. I like sectoral balance data because it shows us how money is flowing around in the economy. I have talked about this before (here and here) but will try and keep it simpler this time. Both David Graeber and Richard Murphy have also recently discussed worrying signs in the sector balances. As David Graeber says it is easiest to understand the principle of balance by considering just two sectors, say public (government) and private (which includes households companies and other institutions, both home and overseas). If government spends £10 billion more in one quarter than it collects in tax then it has a deficit of -£10 billion and the private sector gets an injection of +£10 billion. Next we divide these amounts by GDP. If GDP is £500 billion per quarter, then government has a deficit of -2% of GDP and the private sector has a surplus of +2% of GDP. We do this for each quarter and see what happens over time.
It follows that if we plot the quarterly public (surplus/deficit) and the private sector (surplus/deficit) they will be mirror images of one another. The actual quarterly data for the UK going back to 1987 is shown below* – perfect mirror symmetry (until the last few quarters where the data is not yet final).
Now we break up the private sector up into components. There is a component corresponding to households, one for companies (split between financial and non-financial), and a component that goes to overseas savers. Below the main plot, I just show the household sector (in red) – that’s us!
You can see that mostly households are in surplus. We are savers. But there are times when we go into deficit, 1989 (followed by a recession in 1990), 2003-08 (followed by a recession in 2009) and in 2016- followed by? The worry at the moment is that the household deficit is growing so fast. In fact it is larger now than in any quarter before the global financial crisis.
If you go back to the upper plot you can see that the government is actually doing what it said it would and reduce the deficit. But what they did not tell us was that this means that the debt ends up on us. Households do not have very broad shoulders – their income stream does not last forever and can be volatile. We cannot sustain this for long. Sooner or later something has to give.