# The Kalecki Equation: A Brief Follow Up

by: Cullen Roche

I am seeing a lot of analysts and advisors using the Kalecki profits equation with increasing frequency. And with this increasing frequency of use, I am also seeing increasingly misleading assumptions built into the analysis. For instance, this article at Advisor Perspectives says profits are likely to decline because the budget deficit is declining. This same article could have been written one year ago and would have misled investors into a disastrously bearish positioning. The thing is, when analyzing the Kalecki equation we have to dive deep into the components to get the full picture. If you're not familiar with the Kalecki equation you might want to review this post of mine and then come back.

If we look at the breakdown of components as a % of GDP we get the picture below. Now, I like to break down the corporate sector as dividends PLUS net investment because dividends have become a huge piece of the pie here in recent decades, as cash flush corporations have increased dividends. This shows the breakdown between the various sectors. Remember, you have to use a 4 or more sector analysis here or you'll get this all wrong. And I have a feeling that's what a lot of people have been doing by looking at the government deficit and just assuming that the private sector won't be able to generate profits without the government. That's the wrong way to understand this. You have to look at the 3 sector analysis and THEN dive into the private sector through a 4 sector analysis that breaks down the business sector and households sector because businesses and net investment are just about always the key component in the profit picture. This is all an extension off Monetary Realism's work on S=I+(S-I). If you didn't understand that equation in 2012, you likely got way too bearish about the economy and the stock market-- which has turned out to be a very bad call.

Anyhow, when you break it down it looks like this:

Click to enlarge

In percentage form, as of the most recent quarter, that's:

• Government deficit: 5.1%