Investment dearth, not savings glut
There is a interesting article in the latest issue of The Economist. As most people here know, the national savings rate in America is now at its lowest level since the Great Depression. What is perhaps less known is the fact that savings have been falling in the other large rich countries too. While the savings rate of for example Japan is still higher than in America, savings have been declining even faster in Japan than in America. Moreover, the rest of Asia (with China being the conspicuous exception) have also seen a large decline in savings
The decline in Japanese savings may surprise some people given the fact that Japan has a large trade- and current account surplus, but the decline in savings have been more than matched by an even greater collapse in investments, unlike in America where the declining savings rate have been compensated by a large capital inflow (aka current account deficit). Not surprisingly, the collapse in domestic investments in Japan has led to a long period of stagnation, just like in Germany where investments have also fallen sharply.
It is therefore wrong to assert,as Ben Bernanke did, that the world has a "savings glut". It would be more accurate to describe it as "investment dearth", with particularly business investments being at too low levels, something which is also evident in the high level of corporate profits in America and most other countries.
There are of course some people who argue that the national savings rate underestimate true savings since education is not counted as investment, even though it (hopefully) will improve productive capacity. That is basically a true point, but taking that into account will neither really change the basic picture of savings in America and elsewhere being at historically low levels or the fact that America even taking that into account has a lower savings rate than the rest of the world.
Comments (11)
I do not see what the problem is with the low savings rates. Is not savings, in that epitome of economic logic called Keynesian economics, a withdrawal from the circular flow of income? Is not the economy really humming along when consumer spending is at high levels? Can not governments solve the problem of a scarcity of capital if they just had the right economic advisors and just turned up the printing presses when needed? Can not our Keynesian-trained economists accomplish what Mises termed turning stones into bread? I'm so confused!
Published: April 10, 2005 7:07 PM
I sent an email to the Bank of Canada a few months ago demanding that they raise interest rates to help improve the paltry savings habits of Canadians. I said to them "so be it" to the rising loonie and accompanying recession.
Not that Canada's is a huge economy--certainly nowhere near those of Germany/Japan/USA. This century, though, will witness a sizable global swing in Canada's favour (assuming Canada survives as a sovereign nation).
Published: April 10, 2005 7:11 PM
I think that the blame for lack of savings, like the low birth rate, can be laid at the feet of the welfare state.
Canada's savings rate is abysmal. Since 3Q 2004 it has been sitting at zero.
A few weeks ago I heard my local radio station's business-show host asking a (Canadian) bank economist why the savings rate is so low, and whether this is something to be concerned out. He said, and I paraphrase, "Oh I don't think that Canadians lack savings, it's just that all their savings have been invested in their houses." I was wondering as I listened - how is a house which eats money every year comparable to an investment in a business which generates profits?
The next night, another bank economist was the guest. He said he suspected that everything was OK, because Canadians were sitting on lots of untaxed savings which they were making in the under-the-table construction industry. He didn't mention how the money hidden in cookie jars and mattresses gets invested in productive businesses. And, I remembered what my buddy who works in the legitimate construction industry told me recently: the guys on his crew who do a lot of under-the-table jobs are not exactly wealthy, in fact he said they're so desperate to make money that a lot of them sell dope on the side.
As for education being an investment: I hardly think that what a lot of young people do in college and university is an investment that will help them work in productive businesses when they graduate. All those graduates in arts criticism, lesbian studies, and so on have mostly just been squandering their parents' and taxpayers' money in fruitless navel-gazing.
Published: April 10, 2005 8:30 PM
This has to be the most harmful effect of Keynesianism. This attack on savings. They are even trying to reduce savings in China. No-one has escaped the scourge of Keynesianism.
Published: April 11, 2005 12:30 AM
I'm in college and I squander it on booze and ammunition. ;)
Published: April 11, 2005 1:52 AM
Why put money in a savings account when I cannot even earn interest enough to cover inflation? It's actually in my favor to spend it, because it's worth more now than it will be tomorrow. Thus does government sow the seeds of low savings by inflation.
However, the same motivation means I don't mind having a loan. So long as the interest rate paid isn't "too high", inflation means that I owe "less" value every day on the loan even if I do nothing. I would much rather pay todays bill with tomorrows inflated money.
Published: April 11, 2005 7:06 AM
The problem with little or no savings is that people have been conditioned to think that they will recieve a pension from the government that will cover their living expenses when they decide to stop working. When a large bubble of non-savers hits the fan, they (through the government) will turn on those who have saved more than they.
As long as the government provides a safety net, there will be people who overspend now, flowing money into the equity savings of others (perhaps artificially high rates), only to claim it back through a reallocation later. The message is spend now and live it up, because those who 'bought equity' with part of their income will foot your bills later on anyway. You get an allocation greater than your own actual labor output, while those who naively saved will get an allocation less than their total labor output (this of course assumes that any 'passive' return one got on their savings will be eaten up by taxation and inflation over the principal 'earned' which I think will be very likely).
Published: April 11, 2005 8:27 AM
I agree with the comment made above about low savings being a direct result of inflation -- asset inflation or commodity inflation it doesn't really matter
why save when the banks lend money at an inflation adjusted 0% or negative %
Citigroup offers credit cards with cash back --5% cash back at grocery and gas stations -- no interest for 1yr--
people aren't betting on pensions or social security -- but easy credit in the future to fund any needs--
the end game comes when the banks are unable to keep the party going -- like the autos -- just give em away -- and make it up on volume
you can't demand savings --- when the banks are giving away money
Published: April 11, 2005 12:21 PM
The long-term fall in savings evident around the world, if true, is a serious problem that will show up in stagnation and falling incomes.
The explanation for the fall in the rate of saving in the US, Asia, and Europe might be monetary inflation: central banks in each region resort to money pumping as an economic cure-all.
The reality, of course, is that money pumping is an economic tragedy that discourages saving by depressing interest rates; encourages borrowing for speculation; and destroys scarce and precious capital through massive misallocation.
Frank Shostak has written brilliantly about the downward spiral of the real pool of funding in the US in the Thirties, and Japan over about the last 15 years. News that saving rates are everywhere in decline adds to my concern that our pool of funding may be in real trouble. If so, the inescapable result would eventually be deflation. For a falling real pool of funding will alter price relationships: capital replacement will become more costly as compared with the revenue those producer goods generate, rising costs will squeeze profit margins, and debt repayment will become difficult. As lenders and borrowers adjust to the new reality of repayment problems, the creation of new bank lending will slow, even as the Fed pumps up the monetary base. The result will be slow money growth as the fed pushes on a string, and the eventual likelihood of toppling dominoes and a contraction in the money supply that the Fed is powerless to avert or control.
Published: April 11, 2005 2:04 PM
Sure there is not much incentive to save right now. All the more reason for reform. I'll post a link from another thread where I try to explain what easy strategic move could make reform more viable.
http://www.goldismoney.info/forums/showthread.php?t=19185
Published: April 12, 2005 12:05 AM
I save my money in the form of physical gold. There is no incentive to save at the moment. House prices at one stage were increasing by a rate of 20% of my pre-tax salary a week. Why would I try to save for a deposit on overpriced houses?
Bring on the deflation.
Published: April 18, 2005 8:55 AM