There’s an adage in accounting: “For every debit, there must be a credit.” Applying Newton’s Third Law from the physical domain —“For every action, there is an equal and opposite reaction”—to the accounting principle makes for an apt analogy.
The financial world—so seemingly complex, so filled with variables and nuance—is, at its core, held together by a single, inescapable principle: everything must balance since no effect occurs in isolation. In his June 2025 commentary, economist and fund manager John Hussman reminds us of this very principle: “The deficit of one sector emerges as the surplus of another.”¹
Let’s take a deeper dive since it’s more than economic trivia—it’s a framework for understanding why corporate America is thriving on the surface while the broader economic foundation may be far more brittle than the headlines suggest.
Sectoral Balances: Not a Theory, an Identity
Economies consist of three broad sectors:
- The private domestic sector – households and businesses
- The government sector
- The foreign sector – our trading partners
At all times, the net financial positions of these sectors must sum to zero. When one sector is spending more than it earns (a deficit), another must be spending less than it earns (a surplus). This is not theory, it’s arithmetic.
If U.S. corporations are generating outsized profits and accumulating cash—i.e., running surpluses—some other sector must be running a deficit to finance those profits. In recent years, those deficit sectors have been the federal government (via deficit spending), households (via consumption and borrowing), and the foreign sector (via persistent trade deficits).
A Mirror Image in Plain Sight
In Hussman’s words, “The massive increase in corporate free cash flow is literally the mirror image of deficits in other sectors.”¹
- Government: From 2016 to 2024, over $12 trillion in new federal deficit spending was authorized—much of it tied to tax cuts and pandemic relief.²
- Households: Income growth has lagged productivity growth, forcing many families to stretch spending with credit.¹
- Foreign Sector: America imports more than it exports, resulting in a persistent trade deficit that mathematically requires domestic sectors to overspend their incomes.
This chain reaction has supported high corporate revenues and margins, but it’s not structural in the long run—it’s conditional on deficits continuing elsewhere.
The Illusion of Permanence
Despite sluggish GDP growth since 2000—slower than in the preceding 50 years³—corporate profits have expanded. This isn’t the result of AI or smartphones driving a productivity boom. Hussman argues that low interest costs and deficit-financed demand have done the heavy lifting.¹
Wall Street treats these inflated margins as the new normal, pricing stocks at levels that assume they will persist indefinitely. But just as profits were inflated artificially, they can also be deflated when deficits fall, credit contracts, or interest rates normalize.
Can Tariffs Reverse the Trend?
Donald Trump’s economic nationalism posits a solution: use tariffs to shrink the trade deficit and “bring manufacturing home.” In theory, reducing imports should improve the foreign sector’s surplus and encourage domestic production.
But Hussman would likely point out that you don’t fix trade imbalances in isolation. Shrinking the trade deficit without addressing underlying household income or government spending deficits shifts the imbalance elsewhere. In fact, U.S. trade deficits historically narrow most during recessions—not because of policy wins, but because consumers cut back and investment collapses.¹
Moreover, manufacturing resurgence depends on more than just protectionism. It requires long-term commitments to worker training, infrastructure, automation leadership, and global competitiveness—factors tariffs alone cannot secure. American manufacturing isn’t just competing on cost—it’s competing on time, efficiency, and scale.
The Real Reckoning
If government austerity returns, households deleverage, or foreign capital inflows recede, corporate profits will inevitably shrink. The investor who ignores this truth is like the builder who marvels at the chandeliers and marble floors, while ignoring the widening cracks in the foundation.
Hussman puts it poetically: “This is, because that is.”¹ Prosperity in one sector arises from imbalance in another. We would do well to remember that when market euphoria tries to convince us otherwise.
Footnotes
- John P. Hussman, The Bubble – Contains the Collapse – Contains the Resurgence, June 12, 2025. https://www.hussmanfunds.com/comment/mc250613/
- Committee for a Responsible Federal Budget, “Trump and Biden National Debt.” https://www.crfb.org/papers/trump-and-biden-national-debt
- U.S. Bureau of Economic Analysis (BEA), Real GDP Data 1950–2024. https://www.bea.gov/data/gdp/gross-domestic-product