Kalecki-Levy Profits Identity (A Flow Model)

[Joe Leote]

Video does excellent job describing the flow variables in the Kalecki-Levy Profits Identity:

Record Profits Aren’t Coming From Where You Think

Where Do Profits Come From? Online paper published by The Jerome Levy Forecasting Center derives the flow identity:

2008_Profits_040208

Figure 3 on page 9 shows a highly simplified two sector economy: Business Sector and Household Sector. The Business Sector has a tank illustrating Net Worth (BSNW). The Household Sector has a tank illustrating Household Savings. BSNW is the residual of Business Sector Assets - Liabilities on the balance sheet as of a closing/opening date. The balance sheet items are considered "stocks" and the income statement or accounting adjustment items are considered "flows" in a stock-flow consistent model. To make the simplified model of Figure 3 stock-flow consistent (SFC) the Consumer Credit Well can be treated as the financial services functions consolidated inside the Business Sector. Flow of funds models try to account for the Net Acquisition of Financial Assets (NAFA) which are the credit transactions that drive flows such as investment or consumption paid via new credit deals. A subset of the real assets are always being revalued via credit deals and the similar assets are repriced via a mark-to-market revaluation process. If the credit system fails to provide new credit then all expenditures would be based on dissaving and/or less saving out of wages. We see that credit deals drive the economy forward and systemic disruptions in the credit system drive the economy into recessions or depressions.

The continous revaluation of assets via mark to market accounting drives up the valuation of real assets and net worth:

The Fed - Chart: Balance Sheet of Households and Nonprofit Organizations, 1952 - 2026  

however the underwater households have valuation of real assets Ku less than liabilities Lu for negative net worth, the debt-financed households have valuation of real assets Kd greater than liabilities Ld for positive net worth, and the net creditor households have relatively higher valuation real assets Kc plus net financial claims Fc against the business sector, government sector, foreign sector, and/or other households. The credit generation process is a flow variable that drives the other flows and stock variables via social customs and institutions.

Joe

[Joe Leote]

This video shows components of net investment and further argues that the federal government is deficit financing household consumption driving up industry profits:

AI Investment Is Booming. So Why Isn’t America?

The wealthy domestic households hold real assets and net financial claims which are liabilities of government, industry, and foreign sectors. The new credit of debtor households and government deficit spending tend to subsidize profits and the accumulating financial wealth owned by the wealthy households.

Joe