How to Read Flow of Funds Accounts : continued
Reading Flow of Funds Accounts
NIPA Data
Going beyond the original concept of social accounting invented by Morris Copeland in the mid-20th century, economists have added macro-economic data relating to the National Income and Product Accounts (NIPA).
This data focuses on the economic concept of savings, which is somewhat different from an accountant's notion of earnings, income, and expense.
Under ordinary accounting, the concept of profit is already fuzzy
In Capital Flow Analysis, we ignore most of the NIPA data, except for certain items that may be useful in specific cases.
Many sector tables the flow accounts do not show a line for profits or income, but instead present Gross Savings (for example, Commercial Banks).
Under ordinary accounting, the concept of profit and loss is already fuzzy. The reconciliation of Gross Savings with earnings passes the boundaries of ordinary analysis. Using Gross Savings as a proxy for earnings is a practical solution.
The accounts also have other data, sometimes in memoranda accounts, that is of interest, such as the relationship between mortgages and home values.
The Accuracy of the Data
None of the instrument tables present on this site have a line for discrepancies, while all of the sector tables do.
The reason for this is that issuers of securities are subject to government regulation and reporting.
Furthermore, many purchasers of securities (such as, insurance companies, mutual funds, and commercial banks), and also subject to government regulation and must report their holdings.
Discrepancies in some years can be substantial
For purchasers of securities that do not report their holdings, notably households, the Federal Reserve calculates holdings as the difference between amounts issued and the known holdings of reporting entities.
Sector tables usually show discrepancies because, not only do they include non-reporting players, like households, but they also show financial accounts that less precisely defined than regulated securities and similar financial assets.
These accounts include such things as 'miscellaneous liabilities', 'miscellaneous assets', and 'trade credit'.
The amount of these discrepancies in some years can be substantial.
The discrepancy in Household flows in Q3 2003 was $ 456 billion — about 27% of gross investment.
Data is also inaccurate because of the size of the underground economy, estimated at about 9% of the GDP, with between 18 and 20 million illegal immigrants in the U.S. and a large part of U.S. currency held abroad by foreigners.
What this means is that, although the flow of funds accounts are extremely useful, we must view them as approximations, focusing on general trends in behavior of major players over long periods, rather than fractional changes in the data from quarter to quarter.
The Basic Patterns
Keeping in mind the quirky nature of these tables, we approach this data with notions of a general pattern, rather that strict definitions.
The presentation of a specific table will deviate from this pattern and must be studied in light of its own peculiarities.
Instrument Tables
The basic pattern of an instrument table is as follows:
| Period 1 | Period 2 | |
|---|---|---|
| Issuers | XXX |
XXX |
| Purchasers | XXX |
XXX |
- In an instrument flow table, the data represents the difference in the balances outstanding in 'period 2' compared to 'period 1'.
- In an instrument level table, the data represents issues outstanding and securities owned by purchasers at the end of 'period 1' and 'period 2'.
Because issuers are expected to 'issue' securities, flows for issuers are presented as positive numbers.
When issuers buyback or redeem securities, the flows appear as negative numbers.
Similarly, purchasers are expected to buy securities, so net purchases are shown as a positive number. When investors are net seller, the figures are negative.
Before proceeding, check your progress:
Self-Test
Instead of profits, some sector flow tables show:
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Flow of funds accounts have discrepancies because:
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Which is not true about instrument tables?
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How to Read Flow of Funds Accounts : continued >
