SFC vs. General Equilibrium: The Primacy of Balance Sheet Realism
Modern macroeconomics often relies on abstract equilibrium models that ignore real financial flows. The Stock-Flow Consistent (SFC) paradigm, developed by Wynne Godley and Marc Lavoie, proposes a radical shift: instead of theoretical assumptions, the starting point becomes the logic of sectoral accounting. This article explains how SFC models demystify the roles of credit and money, serving as a precise tool for strategic forecasting. Readers will discover why the systemic consistency of stocks and flows is the key to understanding crises and why money and credit act as a temporal medium for coordinating economic plans over time.
Watertight Balance Sheets and the End of the Money Neutrality Myth
The foundation of SFC is the watertight principle: every financial asset in the system is simultaneously someone else's liability, and the sum of all sectoral balances must always equal zero. This ironclad accounting identity makes a universal financial surplus across all sectors logically impossible. If the private sector saves, another sector—government or foreign—must run a deficit.
SFC dispels the myth of credit neutrality and exogenous money. Credit is not a passive pipeline for savings, but an act of creation of new claims. Money, in turn, is endogenous—its supply adjusts to the demand for credit, and the central bank manages its price (the interest rate) rather than its volume. In this view, money and credit are tools that anchor future expectations within the present reality of balance sheets.
From REG to DIS: Mechanisms of Redistribution and Inflation
The sequence of SFC models reveals the structure of the global system. The REG model explains the twin deficit problem: in a currency union, a region's trade deficit must be offset by fiscal transfers to avoid insolvency. The OPEN model exposes the institutional incompleteness of fixed exchange rate systems, where forgoing currency adjustments forces sharp reactions within a state's fiscal circuits.
The INSOUT model introduces the hierarchy of money, portraying commercial banks as active players creating deposits subject to capital requirements. Meanwhile, the BMWK model proves that the interest rate does not just regulate income, but redistributes it between labor and rentier capital. In the DIS model, inflation ceases to be a purely monetary phenomenon, becoming the result of a conflict over income distribution, where inventories serve as a buffer for imbalances between production and demand.
Europe, the US, and the Arab World: Analyzing Imbalances in Business Strategy
The logic of SFC manifests differently depending on the cultural context. In Europe, the ordoliberal ethos of austerity clashes with the mathematical necessity of debt among trading partners. In the USA, the dollar's status allows the logic of compensation to be pushed outward, while in the Arab world, religious norms regarding debt necessitate the use of equity-based contracts, which must still adhere to the rigors of stock-flow consistency.
For global business, the concept of Haig-Simons income is crucial, as it incorporates capital gains and the impact of inflation into wealth assessment. SFC provides an early warning system for crises by identifying moments when private sector debt detaches from the actual capacity to generate income. In the future, artificial intelligence may automate structural modeling, verifying business scenarios for their balance sheet feasibility within a "watertight" matrix.
Summary
The SFC paradigm is more than just analytics; it is the grammar of public discourse that ruthlessly separates feasible political programs from those that are merely performative contradictions. In this complex game of balances and flows, where every gain is someone else's loss and every stability masks an imbalance, these models become a mirror of our collective economy. Are we ready to look into that mirror and accept that in a closed financial system, not everyone can be a net creditor at the same time?
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