Via the excellent Damien Boey at Credit Suisse:
Infrastructure stimulus package in the wings? Numerous press reports are emerging that US President Trump is mulling over a USD 1 trillion infrastructure stimulus package to shore up the recovery. The reports follow recent Fed announcements (or more precisely, reiterations with more detail) on corporate bond purchasing and “Main Street” lending programs. In response to the newsflow, equities are rallying, while bonds are weakening. The optimism is understandable. After all, infrastructure spending has long been touted as a way forward for the US economy, with bipartisan support. And if the Fed put is alive and well, perhaps we can get the best of monetary and fiscal stimulus at the same time.
More fiscal stimulus should mean more private sector saving. It is a national accounting identity that the sum of saving across all sectors in the economy must equal zero. For every lender there is a borrower. Re-arranging the identity, private sector saving—the sum of corporate and household saving—must equal the sum of the trade balance and fiscal deficit. Going a few steps further, corporate saving should equal the sum of the trade balance and fiscal deficit minus household saving, and corporate profits should equal this sub-total plus business investment. More fiscal stimulus should support corporate saving and profits, provided that it is not completely saved by households, or whittled away by larger trade deficits. The positive about infrastructure speding is that it bypasses households’ decision to save or spend, and directly injects cash into the economy. It should directly flow through to corporate saving and profits.
