How To Interpret Flow of Funds Accounts
Explaining Capital Flows
There are two levels in the process of using flow of funds accounts for Capital Flow Analysis.
- The first level is simply reading the flow tables and understanding the obvious implications.
- The second level is to go beyond the tables, studying the history, sociology, and institutions that motivate the actions of the various classes of players.
The second level is more difficult than the first.
In this lesson, we deal with the easier task of explaining flows by reading the flow tables.
Sector and Instrument Tables
In Lesson 23, we explained how to start flow of funds analysis by going to the red-green instrument table for the security market that we are studying.
The instrument table tells us which sectors (households, corporate issuers, mutual funds, etc.) have been net buyers or sellers of that class of security and how their asset allocation patterns have changed over time.
Sectors in the left column of an instrument table have corresponding sector tables, showing sources and uses of funds for those sectors.For most of the players listed in the left column of the instrument table, there is a corresponding yellow-blue sector table.
Reading Sector Tables
The sector tables are divided horizontally into three parts.
- At the top is the NIPA section (National Income and Product Accounts) that is sometimes shown against a gray background.
- Next, against a blue background, are the various financial and other assets that the sector holds.
- Finally, in the third section, against a yellow background, are changes in categories of borrowed money and capital accounts for the sector.
One line of the NIPA section is marked with a yellow background to indicate a source of income or savings for the sector.
Sometimes the NIPA section has only one line and this is coded yellow to indicate a source of funds.
The theory used to compile data in the NIPA section is often incompatible with accounting concepts.
Some lines in the NIPA section are not of interest in Capital Flow Analysis.
Sources of Funds in a Sector Table
In the sector tables, sources of funds are shown against a yellow background and usually consist of:
- current income from the NIPA tables;
- new borrowed money or capital infusions; or
- the sale of assets.
Uses of Funds in a Sector Table
Uses of funds in a sector table are shown against a blue background and consist of:
- purchase of assets;
- reduction of debt or capital accounts; or
- losses or dis-savings in the NIPA accounts.
Connecting Instrument and Sector Tables
The instrument tables show which sectors have been buying or selling a particular type of security.
Sector tables show how players finance the net purchases that are shown in the instrument table and where these players apply proceeds of sales.
The coding conventions on this site facilitate interpretation:
- Purchases of securities appear with a green background on the instrument tables. Since purchases represents an application of players' funds, amounts equal to these purchases appear on the corresponding sector table against a blue background, signifying a use of funds.
- Sellers of securities appear with a red background on the instrument tables. Since selling securities is a source of funds, the net proceeds appear on the corresponding sector table against a yellow background.
By comparing flows on the instrument table with flow on the related sector tables, it is possible to see how players have been financing their purchases of securities and what they have done with the proceeds of sales.
This is the obvious and easiest way to discover reasons why players are buying and selling securities.
For example, if in a particular period we note that Households have been selling equities and mutual funds while buying bonds and money market funds, we might conclude that individual investors have grown weary of the stock market and are seeking safer, more conservative investments.
Before proceeding, check your progress:
Self-Test
A flow of funds instrument table has:
|
|
Two of the three horizontal sections of a sector table are:
|
|
Sector uses of funds include:
|
