Author Archives: Rafael Wildauer

A financial balances comment on the US trade balance and Trump’s economic proposals (Part I)


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[This post was co-written with Rafael Wildauer, lecturer at Kingston University Business School, who is doing research on the links between income and wealth distribution, credit, growth and financial stability].

It has been almost one year ago from our latest comprehensive report on the US economy, and although we are currently writing our second report which will be published soon (it took us longer than expected, given that our model has undergone several modifications, the most important one being a private sector split between households and businesses), we wanted to share a couple of thoughts with our readers on the current state of the US economy, especially since the election of president Donald Trump in November. The economic proposals the incoming Trump administration are supposed to bring are important, and if eventually fulfilled, we think they will have a clear impact on the economy over the medium-term. In this first part of a two-post series, we will review the recent evolution of the balance of payments and, in the second one, we will go through the effects of Trump’s economic proposals on the future path of the US sectoral financial balances.

While many observers are bewildered by the first steps of the Trump administration, economically the US seems to be doing fine, with GDP growth around 2.5 in 2014 and 2015 and an improving current account. A closer look however shows that the recovery of the current account was strongly driven by an improving oil balance. The trade deficit ex-oil increased over the last three years. A likely explanation is that the US grew faster than some of its main trading partners (notably Europe), which led to a deterioration of the trade balance. Thus, under the economic proposals by the incoming Trump administration and not much further room for an improving oil balance, the current account might deteriorate again. Continue reading

The Kingston Financial Balances Model and the external sector consequences of Mr. Sanders


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[This post was co-written with Rafael Wildauer, Ph.D. Candidate at Kingston University, who is doing research on the links between income and wealth distribution, credit, growth and financial stability]

We are pleased to present our first report on the US economy using a model we have developed together over the last year. We will only provide here a brief summary with the main conclusions; interested readers can read the whole report for free here. Senator Sander’s economic program (and the discussion that has erupted in the last few weeks) has provided us with a nice example of why having a simple but holistic model of the US economy can help a lot in discussing economic policy issues and in dispelling ‘half-way’ economic reasoning. Because a copy-paste strategy from the report would be boring for the readers of the blog, we have decided to add a brief analysis of the Mr. Sander’s economic program as an example of the usefulness of the model advocated here. We think it is worth discussing what has been left out by Gerald Friedman as well as by his critics – notably Christina and David Romer. If you already read the original report, then you can skip the first section and go directly to the section dealing with Mr. Sanders’ economic program.

The Kingston Financial Balances model (KFBM)

First, a few words about the model. The Kingston Financial Balances Model (KFBM) is a stock-flow-consistent (SFC) model that tracks the evolution of the main variables of the US economy. A SFC model is, in a nutshell, a framework that ensures that all real and financial flows of an economy accumulate into stocks over time. For many people (e.g. engineers, physicists and accountants), we are sure this definition will not be very innovative. But in economic modelling, it is. Most of the economic modelling is carried out without any concern for the accounting consistency of real world economies. At the most basic level, such models simply estimate ‘sophisticated’ econometric equations for the GDP components (i.e. consumption, investment, etc.), and then they sum them up to come up with a (usually short-term) forecast for GDP, but without mentioning the implications of these expenditures for the financial positions of the different sectors of the economy. At a more advanced level, exemplified for instance by the Dynamic Stochastic General Equilibrium (DSGE) models, the sophistication falls on a rational description of the agents of the economy, but again, with little concern for the accounting consistency of the framework. In other words, economists have been in general very busy to come up with more sophisticated models, but accounting consistency is not among the top priorities.

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