No Savings, No Problem
Government figures put US savings at 0.3% of income. Two recent articles (Are Spendthrift Americans Really the Problem? in the New York Times, and A Savings Crisis? Maybe Not in Business Week, state that the alleged low savings rate in the US is either mis-measured or not a problem anyway.
The charge of mis-measurement may carry some weight. Certainly, pension contributions and retained earnings of business are savings (however the use of retained earnings to "enhance shareholder value" through stock buybacks to offfset option dilution is not savings).
The remaining content of the articles is a hopeless muddle of economic illiteracy and fallacies. Savings in the economic sense means abstaining from a consumption opportunity, and instead, transferring the purchasing power (or goods saved in a non-monetary economy) toward the creation of producer goods, otherwise known as capital. In an advanced economy, nearly all of our ability to consume comes from the productivity of capital goods. Without capital we could consume only what we could gather in a day. Regular savings is necessary to maintain the existing stock of capital as it wears out, and additional net savings is required if more capital is to be created. In a society with no savings, all of the capital will eventually wear out and the people will be gradually impoverished.
- Contrary to Fed Governor Ferguson, asset price appreciation is not savings in the economic sense. It is only a change in the market valuation of capital produced with past savings. If asset prices increase, then the holders of those assets are better off relative to those who do not hold them, but there is no net new savings.
- Spending is not savings. Some expenditures consist of the spending of savings, such as business spending on a new plant, or perhaps R&D. But the money must have first been saved in order to be spent.
With a fractional reserve banking system, the total amount of money borrowed is much greater than the amount saved because banks create debt as they create more money. If all the money that were borrowed were invested in capital goods creation, then investment would exceed voluntary savings. The newly created debt-money is used to bid for factors - land, labor, and complementary capital. In the end, there is "forced savings" as some of the debt-money bids away factors from consumers or early stage capital investments.
- One of the most popular recent fallacies is the idea that we Americans don't need to save any more because "foreigners will do it for us." This is about as helpful as having someone else exercise for you. Because there now exist international capital markets, the argument goes, and foreigners save, they can send us their savings and we can then consume all of our income without the need to postpone any consumption at all.
This is true subject to two provisos: if we are happy to sell them all of our productive assets in exchange for present consumption, or so long as foreigners are willing to take phony IOUs that will be defaulted before they can be redeemed, we can consume their savings. In both cases, though, America will become impoverished as our capital strucure wears out and is not replaced and find ourselves unable to borrow any more and unable to produce anything.
It would be true that a country that does not have savings can still grow if savings are imported from the rest of the world and spent on productive assets such as new product development, factories, mines, agriculture, etc. However, most of the so-called foreign "investment" in the US is for the purchase of US Treasuries - government debt used to fund government consumption -- or agency bonds -- bonds issued by the mortgage GSEs for residential housing, another consumption good.
- Finally, savings may be a moral question, but it is certainly an economic one.
Comments (12)
Steven Kane
Mainstream economists today seem to be completely opposed to savings. Their doctrine is that a healthy economy is one in which people are consuming consuming consuming. In fact, this is one of the main arguments I have heard in support of inflationary policies i.e. the Federal Reserve has to make sure people don't hold on to their dollars for very long. Of course, it is completely absurd.
Published: January 10, 2005 10:17 PM
David Heinrich
A 0.3% savings rate is pure insanity. It's amazing to me that people think this is somehow magically ok. Barbaric brutes engaged in more "savings" than the US does as an average. Even squirrels -- mindless creatures -- save nuts in the summer to dig up in the winter.
Investing money is one way of "saving" it. All forms of "saving" must be invested somewhere -- stocks, bonds, real-estate, precious metals, or fiat-currency. However, when the valuation of these assets increases, as RPM notes, that is not an increase in savings. It is only an increase in the valuation of something previously saved.
Published: January 11, 2005 12:06 AM
Vanmind
"Mainstream economists today seem to be completely opposed to savings."
Yeah, well, mainstream anything these days appears synonymous with "guaranteed to be working against the interests of all but a select few."
Published: January 11, 2005 3:10 AM
DallasW
who would have thunk that a group of libertarians would wind up second guessing the outcomes of individuals working in their own self interests.
if this aggregate measure of average savings accuratley reflects the consumption preferences of individuals in the united states, then who are we to declare those valuations as "insane"? certainly these individuals are acting in their own self interest, aren't they?
Published: January 11, 2005 4:12 AM
John Bigelow
"certainly these individuals are acting in their own self interest, aren't they?"
Especially given the numerous other posts on this site predicting the coming collapse in the value of the US$, spending it now seems to be quite sensible.
Published: January 11, 2005 8:14 AM
sd
DallasW--
Consumers and producers are acting in their own self-interest, but they are acting on signals that have been sent distorted by the state (namely, government inflation of money and credit discourages savings).
Published: January 11, 2005 8:14 AM
Steven Kane
"DallasW--
Consumers and producers are acting in their own self-interest, but they are acting on signals that have been sent distorted by the state (namely, government inflation of money and credit discourages savings)."
In addition to that Hans-Hoppe has pointed out that taxation(especially the extreme taxation we live under now) reduces people's income and increases people's time preference, causing them to save less and consume more.
http://www.hanshoppe.com/publications/time_preference.pdf
Published: January 11, 2005 10:53 AM
Paul D
"In addition to that Hans-Hoppe has pointed out that taxation(especially the extreme taxation we live under now) reduces people's income and increases people's time preference, causing them to save less and consume more."
Exactly. Instead of forgoing consumption now (saving) to increase productivity later, people are consuming all their income now. They're even starting to consume capital investments, an occurrence that could lower productivity in the future.
Low time preference - the willingness to trade wealth now for greater wealth later - is rapidly disappearing, due to government taxation, socialism, and distortion of the financial markets.
Published: January 11, 2005 6:52 PM
Vanmind
Good points.
I saw a news article the other night that reported sales of "luxury vehicles" are way up compared to other kinds of vehicles.
People--especially people who understand what's coming--are trading in their next-to-worthless US dollars for hard, tangible assets. Soon we may see bidding wars for shovels.
Published: January 11, 2005 7:09 PM
Ohhh Henry
Canada's personal saving rate is even worse: 0% (Zero percent).
Canadian Economic Indicators
Government is booming however - huge surpluses at the federal level, some of which will be applied to the debt, but the rest is earmarked for porkbarrel spending to buy elections. Tax cuts are not in the cards.
Government revenue is growing at a far higher rate than personal earnings. I'm not sure what accounts for this but I suspect that it has to do with royalties extracted from a booming resource sector (raw materials price index up 19.7% yoy) and from corporate taxes (Operating profits of enterprises also up 19.7%).
A while ago when I went looking for analysis of the Canadian savings rate, all I could find was an article by a bank economist concluding that the lowest savings rate is OK - because "it doesn't endanger consumer spending".
Published: January 11, 2005 10:46 PM
Francisco Torres
"A while ago when I went looking for analysis of the Canadian savings rate, all I could find was an article by a bank economist concluding that the lowest savings rate is OK - because "it doesn't endanger consumer spending"."
Makes you wonder just what the hell does this "economist" think that banks are really for. He must think wealth is created by turning the crank in government's money machine. What idiocy!
Published: January 12, 2005 12:20 PM
newb
Canadians have a low savings rate but do not have as much debt as Americans. Whats the point in Saving 10 cents in you bank account when you just racked up 50 cents on your credit card.
Further, most savings rates do not include forced government savings such as RPP in Canada or capital investments. Sure people are saving less, but the banks screw you with low to zero interest rates and user fees.
Why put your money in a bank account when you can paydown student loans, invest in a house (no taxable gain there) or invest in RRSP's (tax deductable).
Don't forget as well that the 30 and unders for the most part are so riddled with school debt that many have lost all hope of even thinking about saving. Again, why would I put $1000 in my bank earning 2.5% when I have school debt consisting of 8% to 19% interest rate. God forbid I have enough for a down payment on a house, well... think I will put my money there, atleast it apreciates. (Of course I myself rent since the housing market is so saturated that I can rent for less than half the financing and running costs of buying a house.)
Published: May 7, 2007 1:06 PM