When considering the economy as a whole, the financial sector has a net zero effect on total wealth. This conclusion stems from two principles: first, all financial assets are offset by corresponding liabilities, and second, households are the ultimate owners of all corporate equity. Therefore, when all accounts are consolidated, the financial claims and obligations disappear from the aggregate balance sheet.

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In a closed economic system, such as the global economy, the total value of debt must be zero in aggregate. This is because for every liability (a debt), there is a corresponding financial asset of equal value held by a creditor, causing the two to cancel each other out when all accounts are consolidated.

Aggregate Debt Cancellation in a Closed Economy

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

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