I caught this comment by Scott Fulwiler on a blog post a 3spoken:
the notion that firms can spend and reduce net saving in order to increase net saving of the household sector–while theoretically true and true in an accounting sense–doesn’t hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm net saving can and has fallen while household net saving increased (and a modest govt deficit).
This is an important thing to realise. Just breaking it down for a sec, let me remind you of my post "Economics 101 on government budget deficits". Money being a medium of exchange means that money is exchanged for goods and services of equivalent money value. There is no value leakage or anything like that. So when you sum up the net deficits and surpluses of any economy, no matter how you break those sectors down, that sum will always be zero.
In practice, national accounts are broken down into a few sectors (government, private sector, external sector). So, that tells you government deficits are always exactly balanced by net imports and private savings. You can’t have net private savings without equivalent net government or capital account deficits. In plain English: if the private sector wants to net save – and that is its normal mode – you need to have net trade surpluses or government deficits or both to offset. Since the world’s aggregate external sectors also sum to zero, this tautology basically means that in aggregate net private savings is balanced exactly by government deficits. Put simply: the government’s deficit is the private sector’s surplus.
What does that mean for a post-bubble world in deleveraging mode? It means that people feel what I have labelled "debt stress", which increases the desire in the private sector to net save. Now the private sector is really three different groups in national accounts. The private sector consists of households, domestic non-financial business and financial institutions. And when you are thinking about private household net savings in a post-bubble world, unless companies are doing a serious capital investment binge or you get serious financial sector losses (net dissaving), the government must deficit spend or increased household savings can’t happen.
The reality, as Scott puts it is that "the notion that firms can spend and reduce net saving in order to increase net saving of the household sector… doesn’t hold up well empirically." Translation: if households are indebted, there is little chance that they can reduce that indebtedness because of a surge in business capital spending (net dissaving) alone because that leads to systemic fragility and the Ponzi stage of Minsky’s dictum and encourages debt accumulation by households. Likely, reduced household debt (ratios) will happen because of government deficits, default, debt forgiveness or inflation.