Thread by @EPBResearch

The US Economy Has An Identity Crisis

The supply of financial capital must equal the demand for financial capital.

seekingalpha.com/article/437086…

1/n

Domestic savings + inflows = domestic investment + government borrowing.

We can rewrite this equation to focus on government borrowing.

Government borrowing = domestic savings + inflows (trade deficit) - domestic investment.

2/n

We know that government borrowing is exploding, so, therefore, for the identity to hold, something on the right-hand side of the equation must change: savings (up), the trade deficit (up), or investment (down).

3/n

Once net national savings turns negative, we have insufficient domestic savings to support the demand for financial capital.

Trade deficits must rise or consumption/investment will decline.

4/n

As world trade slows and all governments suck on the pool of financial capital, the most likely outcome is a decline in investment (already in decline as a % of GDP).

This has broad (negative) implications on productivity growth.

5/n

The Federal Reserve cannot alter this identity as they buy assets from the open market with reserves, not spendable dollars.

Huge thread on this discussion here:

https://twitter.com/SantiagoAuFund/status/1298310189276213248?s=20

6/n

As a result, the growing budget deficits will most likely lead to a decline in domestic investment, translating to years of lackluster productivity growth.

With labor force growth of only 0.4%, we run the risk of sub 1% trend growth on a real per capita basis.

7/n

Interest rates will continue to fluctuate and have volatility depending on the expectations of inflation, tied to the movements in industrial commodity prices, but will trend lower (near 0%), over the longer term with falling rates of economic growth.

8/n

Full analysis on:

Seeking Alpha: seekingalpha.com/article/437086…

EPB Macro Research: epbmacroresearch.com/2020/08/26/the…

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