By FERNANDO NOGUEIRA DA COSTA*
The income flows and wealth stocks of the five institutional sectors—households, corporations, governments, banks, and foreigners—are systemically interconnected.
The income flows and wealth stocks of the five institutional sectors – households, firms, governments, banks and foreigners – are dynamically interrelated, varying over time based on diverse economic, political, social and international conditions. The economic-financial system can be understood as a network of reciprocally influential flows, with Feedback (feedback) capable of affecting the behavior of each sector and its accumulated wealth.
Instead of making an “empty denunciation” of “financialization,” it is more instructive to analyze these interactions in terms of income flows (short-term variables) and wealth stocks (variables accumulated over time), considering the dynamic circuit of how they change and interact with each other. You will understand financial capitalism instead of preaching its “moralization” in vain…
Households receive income streams from wages, profits, interest and dividends paid by companies, banks and, in some cases, subsidies and transfers from governments. They may also receive investment income, such as dividends from stock holdings, rents from real estate or interest from public and private bonds.
The stock of wealth accumulated by households includes savings, real estate, stocks, and other investments. This stock is modified by flows of income in excess of consumption, as well as by changes in the value of assets due to changes in real estate and financial asset prices.
Dynamic interactions occur in the following ways. Households provide labor to firms and receive income in return. Household demand for goods and services influences corporate profits, affecting both the firms' revenue stream and their ability to distribute dividends.
Families pay taxes and receive social benefits from the government. In situations of poverty, the government often increases transfers such as social assistance and unemployment insurance, affecting income flows.
They take out credit (real estate financing, personal loans) and make deposits in banks. Credit conditions affect their consumption and investment in real estate.
Households tend to consume imported goods and may invest in foreign assets, receive remittances from abroad, impacting trade and capital flows. Therefore, they interact with all other institutional sectors.
Businesses receive income from sales of goods and services, which are influenced by demand from households, governments and international markets. They also raise funds through the issuance of shares or bonds and may obtain bank credit. Their wealth stocks include physical capital (plants, machinery), financial capital (reserves, shares) and product inventories. The value of businesses can also be impacted by external factors, such as changes in financial markets or government policies.
Household consumption is the main source of revenue for many companies. Changes in consumption directly affect cash flow and the ability to expand or contract investments.
Businesses pay taxes and may receive tax incentives or subsidies. Government regulation also influences costs and profitability. In a crisis, fiscal policies (such as stimulus) directly affect business activity.
Businesses rely on credit to finance their operations and expansion. Liquidity conditions and interest rates impact the ability to borrow and invest.
Firms involved in international trade are subject to exchange rate fluctuations, trade policies, and external demand, which affect their revenue flows and wealth stocks. Therefore, their institutional interactions are dynamic.
As income streams, the government collects taxes from households and businesses, and raises funds by issuing public debt securities. It spends on public services, infrastructure, and social transfers. Its wealth stocks include public assets (infrastructure, international reserves) and public debt. The latter is either internal or external, and its level affects fiscal and monetary policy over time.
The government collects taxes on household income and provides services and transfers, such as pensions and unemployment insurance. Economic crises force the government to increase spending and deficits, impacting the debt stock.
The government provides companies with infrastructure and a regulatory environment. Taxation and tax incentives influence the competitiveness of companies.
Banks buy government bonds and are important financiers of the government. Monetary and fiscal policies affect liquidity conditions and interest rates, with an impact on the banking system.
Governments, if they do not have part of their domestic credit expanded, issue debt abroad. Fiscal and monetary policies affect the balance of payments and international capital flows. They depend on foreign exchange reserves.
Banks generate income or revenue streams through interest on loans, financial services fees, and investments. They lend to businesses and individuals, influencing the flow of capital in the economy. Their wealth stocks include bank reserves, credit portfolios, and financial investments. The financial health of banks depends on the quality of their assets (loans granted) and financial market conditions.
The banking system facilitates household consumption and investment by offering credit (housing and personal finance) and savings products. Changes in interest rates affect the cost of financing and the level of consumption.
Banks finance corporate operations and investments. The cost of credit and the availability of liquidity directly affect a company's ability to expand.
Banks are buyers of government bonds, financing the government. In addition, the government's monetary and regulatory policies affect the liquidity, solvency and capitalization conditions of the banking sector.
Banks also operate internationally, raising funds or making loans abroad. Exchange rate movements and international monetary policies influence bank capital flows.
The rest of the world interacts with the domestic economy through international trade flows, capital flows (direct and portfolio investments), and exchange rate movements. Foreigners purchase financial assets, government securities, and products from domestic firms. Their wealth stocks at home include foreign direct investment, equity stakes in domestic firms, and international reserves, which are affected by trade and capital flows.
Households can buy imported goods and invest in foreign assets. Changes in exchange rates affect the prices of imported goods, impacting consumption.
Companies depend on international markets for exports and imports. In addition, they can attract foreign investment or carry out international mergers and acquisitions.
The government participates in the international capital market and finances itself by issuing external debt. Changes in exchange rates and global monetary policy affect the stock of public debt and the balance of payments.
Banks act as intermediaries in the flow of capital across borders, facilitating international lending and investment. Given global financial integration, external shocks (such as the GCF-2008) spread rapidly through banks.
Over time, changes in any one of these sectors ripple through the others, creating economic cycles of boom and bust. For example, a banking crisis restricts credit, affecting business investment and household consumption. An increase in public debt raises interest rates, making credit more expensive for businesses and households. Currency fluctuations and international financial crises influence trade and capital flows, impacting both the business sector and governments.
In summary, the income flows and wealth stocks of the five institutional sectors are interconnected in a systemic way. Their temporal dynamics (variations over time) create a cycle of feedback continuous. It must be intelligible to everyone!
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/4dvKtBb].
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