As I wrote yesterday, government deficits are the biggest driver of elevated corporate margins. This is significant in the US given the looming fiscal cliff and the already ongoing margin mean reversion. Using the financial sectoral balances approach, it is clear that larger government deficits allow for larger non-government surplus.
The question is how those surpluses are distributed amongst the four major non-governmental sectors which are households, non-financial business, financial institutions and the external sector. Because the US is a large continental economy and the government 'trades' mostly with domestic economic agents, large changes in the trade balance are not part and parcel of net government dissaving. Rather, the net surpluses are mostly split amongst domestic business...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.