Sectoral analysis is based on the insight that when the government sector has a budget deficit, the non-government sectors (private domestic sector and foreign sector) together must have a surplus, and vice-versa. In other words, if the government sector is borrowing, the other sectors taken together must be lending. The balances represent an accounting identity resulting from rearranging the components of aggregate demand, showing how the flow of funds affects the financial balances of the three sectors.
OK. The private sector must end up with more financial assets when the government is borrowing.
Equally so, the private sector must end up with control over fewer real assets when the government is borrowing. For the government is borrowing to take control over real assets. The same sectoral accounting identity means that as government does so then the private sector must have control over fewer.
There’s got to be something wrong with that because it cannot be that simple. But using a wide definition of real assets – like, the attentions of the people being paid money by government – it seems to be true. So, why is it wrong?