Global imbalances and the dichotomy between real and financial sector returns

Economists divide the macro-economy into two parts the real sector and the financial sector. While the real sector of the economy produces the goods and services, the financial sector, which is made up of the banking system and capital markets, serves to provide the funding needed for the real sector to function. This funding occurs in two broad forms; debt and equity, while debt has lower cost, it is riskier than equity. One can invest directly in the real sector by establishing a business or indirectly via investments in bonds, stocks or even bank deposits. If as theory says, financial sector investments get channelled into the real sector, then risk-adjusted earnings from financial investments should be reflective of real sector returns. While equity returns should correlate with rea...