By Thornton “Tip” Parker
As NEP readers know, the economy consists of private, government, and foreign sectors. Financial flows among the sectors always add up to zero; that is, one sector’s deficits must be offset by surpluses in either or both of the others.
If the private sector imports more than it exports, ignoring investment flows, it will run a financial deficit while the foreign sector runs a surplus and the economy will then slow down as money in the private sector becomes scarce. Unless the trade deficit is reduced, the only way to keep the economy running is for the government to run large deficits, as is it is doing now. While few people understand the sectoral view of the economy, many are aware of problems that this one-dimensional view does not explain. Continue reading
