Sectoral Balances

Money as a System

To exist, money has to be issued, obviously. Less obviously a monetary system - a circuit - is not born until a return is tallied. Reasons for returning money to its issuer are its acceptance and must be established before issuance. If no mechanism for its eventual return (retirement) exist, or its return in initial form refused, there is no money system.

Sectoral Financial Balances

A sectoral balances perspective helps us to understand the relations among the monetary spending and income of the three economic system sectors: external (foreign), government and non-government (private domestic) which includes banks and households.

Insight into monetary system events may be drawn from this one accounting identity alone - it says, when appropriately defined, sectoral balances must sum to zero. It is impossible for all sectors (and countries) to run surpluses (to save overall - spend less than their income). For one sector to run a surplus, at least one other sector must run a deficit.

Analysis of disaggregated private domestic sector financial balances would yield a bonanza of useful information, if such monetary circuit operations were practically observable. The story of private domestic sector balances in an evolving monetary circuit is absolutely necessary when we consider a sectoral balances perspective. New supply of state and private money, its uses and movement around a monetary circuit, determine the intrinsic dynamics of a monetary production economy. A stock-flow consistent framework is uniquely applicable to exploring monetary circuit operations and chain-of-payments effects.