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Great Britain: Money Flows, Investment Markets, Inflation And Recession Risk

May 02, 2018 4:20 AM ETDBUK, EWU, FKU, HEWU, QGBR, EWUS8 Comments
Alan Longbon profile picture
Alan Longbon


  • Overall sectoral flows are now negative and getting worse thanks to a current account deficit and government austerity politics.
  • Private credit creation from banks is driving money growth but households and businesses cannot deficit spend by borrowing money from banks or spend accumulated savings to fund expenditure indefinitely.
  • The current account deficit is draining growth.
  • The net money supply is decreasing domestically and deflation and unemployment must result.

The purpose of this report is to look at macro money flows in Great Britain and assess the impact on investment markets.

I last looked at Britain in the following articles:

Britain Is In The News, Is It Also An Opportunity To Buy?

Bad News: U.K. Government Drains GBP 3.9B From The U.K. Economy

U.K. ETFs Are Not A Buy

This report was produced using a balance of national accounts assessment of Great Britain.

One can summarize the national accounts in the following formula:

GDP = Private Sector Spending [P] + Government Sector Spending [G] + External Sector Spending [X]

See the methodology section below for more detail on this formula.

Each sector will be examined in turn starting with the private sector.

Private Sector

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - More loans created than repaid. Also known as credit money bank money, endogenous money and inside money.

  2. Externally from overseas commerce - More exported than imported.

  3. Government spending - more spent than taxed out. Also known as sovereign money, state money, outside money, exogenous money and high powered money. It has no liability attached to it.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive.

This article was written by

Alan Longbon profile picture
My investment approach is very simple. I find countries with the highest and strongest macro-fiscal flows and low levels of private debt and invest in them using country ETFs and contract for difference (CFDs)I use functional finance and sectoral flow analysis of the national accounts of the nations I invest in. This is after the work of Professors Wynne Godley, Micheal Hudson, Steve Keen, and William Mitchell. Roger Malcolm Mitchell, Warren Mosler, Robert P Balan, and many others.One can analyze a country in seconds with four numbers as a % of GDP and these are G P X C where[G] Federal spending.[P] Non-Federal Spending.[X] Net Exports[C] CreditOne can then derive a set of accounting identities that are correct by definition.GDP = G + P + XAggregate Demand = G + P + X + C or GDP + Credit.GDP = GDIG and X are regularly reported in official national account statistics and one can work out P as follows:P = G + XAsset prices rise best where the macro-fiscal flows are strongest and where the private sector balance is highest.The 20-year land/credit cycle identified by Fred Harrison and Phillip Anderson is also a key investment framework that I take into account.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

KylerM profile picture
It also looks like M1, M2, M3 have decreased some as of recently. Loans to private sector have also slowed the last 3 releases. Household debt to GDP is also down to 86.5% from 87%. Would this imply loans are being repaid and money is being destroyed? A potential catalyst for a stronger GBP?

Alan Longbon profile picture

Yes, spot on.

Also I see regular reports on the Internet news about slower retail sales,sentiment levels down, lower production and orders. All the background indicators for a slow down.
'The private sector is where the stock market is'

OK, but c. 75% of the earnings of the FTSE 100 are earned outside the UK, so not only are they not driven by UK domestic demand, they rise as £ falls. The UK market is in effect a relatively cheap way of playing demand in the rest of the world. Agreed that the UK domestic economy is a mess, given the debt overhang, continued austerity and the horrors of Brexit, but that hits me as a UK citizen and taxpayer, not as a UK investor.
Alan Longbon profile picture
Hello and thanks for reading and commenting.

You make some very good points.

The external sector is the rest of the world and is also classed as part of the private sector. But money flowing there does not help out the poor old domestic private sector.

If profits from overseas were that good the capital flows would improve the current account. Most likely though they are in offshore accounts for tax reasons. Means tho that some domestic company shares can still do well and is a good point.
Not sure you actually understand the UK market. 'Most likely though they are in offshore accounts for tax reasons' - no, the FTSE100 is mostly comprised of companies whose turnover is mostly outside the UK. Think about Shell, Unilever. Glaxo. The UK's current account deficit is irrelevant to these companies, except that a weaker pound INCREASES their profits. This is why the FTSE100 has done well despite Brexit.
Alan Longbon profile picture
It’s no good holding a great company when the entire market is tanking.

FTSE100 has done well because of Brexit and the currency devaluation it has brought. A currency down stocks up story.
seekingfoolishness profile picture
Churchil quote is worth the price of admission, alone.!!!!! Following.
Alan Longbon profile picture

Thanks, I am glad you like it.
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