The AP is reporting that the US saving rate was negative for all of 2005, something that hasn’t happened for 70 years:
The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.
With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years.
But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement.
“Americans seem to have the feeling that it is wimpish to save,” said David Wyss, chief economist at Standard & Poor’s in New York. “The idea is to put away money for old age and we are just not doing that.”
Is this such a bad development? Yes, it shows the success of coercive polices meant to foster consumption over saving. But let’s keep in mind an important caveat: Today there are many other forms of saving that didn’t exist in the 1930s, the preference for which may cause the official saving measures to show declines. That this happens reflects the extent to which money in a fiat world has ceased to be a store of value and has lost the market test to other goods perceived to have higher use and exchange values.
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unfortunately, the fed’s manipulation of the currency causes the interest rate to be artificially low (as if there were a savings glut). This causes false signals to be sent into the market and is the cause, in my humble opinion, of the artificial bubble in real estate. Classic Mises/Hayek/Rothbard Austrian Business Cycle Theory.
Greenspan’s successor, unfortunately, is not an austrian, but rather a friedmanite monetarist. Scary stuff.
Do measures of savings include money placed in retirement accounts, like Roth IRAs, 401(k)s, 403(b)s? I keep a minimum amount of my money in physical cash, checking, savings, money-market; I keep the most significant portion of it in retirement accounts, and in physical bullion.
Gold and silver kept as a physical asset is also another source of “underground savings”.
Can someone explain why the Fed manipulating the currency (ie, printing paper from thin air) causes interest rates to be low? Wouldn’t it do the opposite? If I am a lender, and wish to make a profit by giving money now and getting it back later, I’d have to account for the value of the money at that later date. If $100 today is only ‘worth’ $70 5 years from now, then I’d have to charge a higher interest rate to make up for the inflation in the monetary supply (with corresponding deflation in value). Where is my thinking off?
In the absence of fed manipulation, interest rate would be set by borrowers vs. depositers. Too many borrowers (booming economy) and not enough depositers, then you have rising interest rates. Not enough borrowers (depression stifles growth, so no need to borrow to expand) and you have too many depositers and the interest rate falls.
The Fed manipulates currency by setting a rate at which it will lend money. If this rate is low, then lots of people will borrow money to expand (even if future demand isnt’ there). The Fed lends to any bank (as long as it meets the Fed’s capital adequecy req’s) as much as the bank can handle (capital adequacy permitting).
Interest rates are usually a signal to the market about savings rates (and consumers’ time preferences). Sending distorting signals will affect business decisions and cause malinvestment of resources. (people building houses (or planting fiber optic cable) for users that will never buy them).
The fed is capable of manipulating rates at the short term end of the yield curve, only. It is completely impotent with regard to medium and long term yields. This is clearly evidenced by the inverted yield curve we are currently experiencing. It does not possess the assets or the liquidity to have any impact on medium or long term rates in spite of the their past empty threats to intervene in the mortgage markets and elsewhere.
Frank,
There is truth to your observation. There will come a time when apprehension over substantial losses in future purchasing power of the dollar will push interest rates way up. It is going to happen, just as it happened a few decades ago.
In the meantime, before the weight of this comes into play, the main influence on interest rates is cheap credit provided by the fed’s continuous injection of new bank reserves each week. This allows the banks to expand credit from thin air and as long as they are making a net return with inflation factored in, they are making money for nothing and credit will be cheap and easy.
For more, scan Rothbard’s “Making Economic Sense” which answers your question directly.
Great thread, thanks guys. I learn something here almost daily.
Actually, in a near-steady state hard currency economy, average savings end up an appreciable quantity of the circulating money, and then the economic cycle naturally stabilises from the interaction of the size of the locked up pool and Pigou’s real balance effect (not to be confused with “wealth effects” relating merely to perceptions of wealth). Then the dissaving matches what is needed to get the economy’s feedback loops working.
The USA never approached this steady state during its hard currency days, and there is too much distortion now to read anything positive into dissaving, but nevertheless it has its place in a properly running economy.
Why do we need the government managing the money supply anyways? Why not allow banks to accept notes, if that is what their customers prefer?
The govt does not force anyone to borrow money to buy toys. When the crash comes the middle class will be wiped out. The half of the middle class who own an average $8,000 on credit cared and who buys things “upside down” will be the new poverty class and those who have paid cash will become the new landlord class.
In other words, we will revert to the “good old days” that people cry for when the only entertainment was going to church for the “Churchly” people and bread & circusses (sports channel and cheap beer) for the rest.
Paul,
You are speaking against your own words.
Frank is now more confused. Sudden jump in interest rates is not because Fed suddenly realizes that purchasing power of money is weaker after some time – it is just game-like manipulating of money supply left and right because it does not cost anything to do so.
Paul, you said yourself, money comes “out of thin air”, right?
Fed wants keep Americans consuming, so that dollar stays strong, otherwise paper has no intrinsic value unless its put into ciculation.
MOreover, when it enters circulation as debt, that where the paper money becomes strength – earning interest, compounding interest!
I hope this helps.
regards,
mamur the economist
Mamur,
Although I can’t say I followed you very well, I will address the part that went “Paul, You are speaking against your own words.”
As Rothbard states, “…interest rates, like any important price, are complex phenomena that are determined by several factors, each of which can change in varying, or even contradictory, ways.”
In “Making Economic Sense”, he continues,
“…Only a repeated injection of inflationary bank credit by the Fed will keep interest rates artificially low, and thereby keep the artificial and unsound economic boom going; and this is precisely the hallmark of the boom phase of the boom-bust business cycle.
“But something else happens, too. As prices rise, and as people begin to anticipate further price increases, an inflation premium is placed on interest rates. Creditors tack an inflation premium onto rates because they don’t propose to continue being wiped out by a fall in the value of the dollar; and debtors will be willing to pay the premium because they too realize that they have been enjoying a windfall.
“And this is why, when the public comes to expect further inflation, Fed increases in reserves will raise, rather than lower, the rate of interest. And when the acceleration of inflationary credit finally stops, the higher interest rate puts a sharp end to the boom in the capital markets (stocks and bonds), and an inevitable recession liquidates the unsound investments of the inflationary boom.”
I hope this makes my meaning clearer because what Rothbard said is all i intended to say.
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