Is there a glut of saving?
Can there be such thing as too much saving? This is like asking if can we have too much real wealth. The greater the pool of saved final consumer goods, the better the quality and the quantity of tools and machinery that can be made, which in turn gives rise to a greater production of final consumer goods, i.e., an increase in living standards. In other words, contra Greenspan, saving can never be bad for economic growth. [FULL ARTICLE]
Comments (13)
I don't think it's correct to say that Greenspan has "fallen prey" to the notion of equating money with savings. Given his libertarian, hard money past he undoubtedly understands what he is doing. I would think that this whole thing about a glut in savings is a charade. They realize that their policy has created significant world instabilities and that there will likely be a downturn sometime soon. They are just setting things up so that the blame falls on the free market rather than on central banking where it belongs. When things go bad they can sit back and say "well, the economy tanked because people were saving too much. We can't leave people alone to manage their own money. The government must keep stimulating consumer demand." It will be used as a justification to continue their unsound policies. That's why it's so important to explode these myths in the minds of as many people as possible.
Published: August 4, 2005 9:25 AM
In the article, Dr. Shostak writes: "it is questionable to establish so-called world liquidity (as the IMF does), which is labelled as savings by averaging the various monetary savings of the world. In the US the only accepted medium of the exchange is dollars. So it is of no consequence whether China’s or European monetary saving is growing. These moneys cannot have any effect on prices of goods quoted in American dollars.
Hence if China, Europe, or any other country is having a glut of money this cannot do much for the prices of American assets."
I would like to ask, are there any circumstances under which foreign savings growth could affect the prices of goods quoted in dollars? What mechanism prevents foreign savings from affecting prices of American assets?
Recently, when CNOOC bid for UNOCAL, it offered a significantly higher price for the company in US dollars which, barring the threat of political intervention by those adept leaders in Washington, would have certainly affected the market price of UNOCAL, and according to some, would have increased the market price of the company beyond its real value. How would you explain this situation, which seems to portray the accumulation of foreign savings affecting the price of an American dollar-priced asset?
Published: August 4, 2005 10:42 AM
Dr Shostak's lucid explanations about real savings and real wealth certainly do much to cut through the dense fog caused by Keynesian and Marxist economic theories. The fact that Greenspan actually dared to mention "a glut of savings" is nothing short of appaling, especially since he and "helicopter" Ben Bernanke are mainly responsible for the printing of fiat currency.
If anyone has been "saving" large amounts of fiat US currency, it has been other foreign central banks such as that of China and Japan. That kind of "savings" does give foreign governments enormous influence over economic developments in America. Without Greenspan's loose money policies, they would never have acquired such influence and would have been in no position to have made a bid to buy out a large American oil company . . . . and using large amounts of US currency at that.
Harry Valentine
Published: August 4, 2005 12:49 PM
"Can there be such thing as too much saving? It is like asking can we have too much real wealth."
Yes, there can. Why? Because savings is the equivalent of inflation. Consider this: If every American had a $100,000 in FDIC savings the net economic effect would be te same as no one having any savings EXCEPT with respect to foreign trade.
Published: August 4, 2005 1:31 PM
I think it is much more effort to refute ridiculous economic assertions such as we are suffering from a savings glut than it is to refute other more reasonable but slightly incorrect assertions. This is because the ridiculous assertions are based on a foundation of a series of implied fallacious arguments which must be addressed prior to addressing the final assertion at hand.
I think Shostak's effort to distinguish savings in the form of money from savings in the form of some other commodity is a fair attempt to avoid the substantial argument in favour of a 100% commodity based money such as gold and the refutation of fiat money or inflation via central banking and fractional reserve banking induced credit expansion.
Assuming a gold coin standard, with no fractional reserve banking, there would be no need to refer to money as a claim on real savings. Money itself would be real savings. Also, the distinction between savings and lending and investing would not be an issue because savings in the form of money are loaned and then invested. That money is a medium of exchange rather than consumed outright does not diminish it as a good that is valued and held by individuals, as well as traded for consumption and investment.
Shostak’s statement that the stock of real savings “cannot be quantitatively ascertained because of the heterogeneous nature of final goods and services� also suggests an argument for an honest commodity money, measured in ounces for instance. With such a money, we could ascertain real savings in terms of a real commodity money because the value of final goods and services would be measured in this form of money.
Published: August 4, 2005 1:34 PM
Frank Shostak is of course entirely right to point out that Ben Bernankes talk of a "global savings glut" is just a myth designed by Bernanke and later echoed by Fed Governor Roger Ferguson and Alan Greenspan to absolve the Fed of any responsibility for the housing bubble. He is also right in pointing out that the Fed has the main responsibility for this.
But with regards to Scott Richard's question, I think it is quite clear that monetary policy in one currency zone will have some effect on other economies too (although of course much smaller than in the domestic economy). Especially if the inflating by foreign central banks take the form of buying U.S. government securities it will lower the cost of capital in the U.S. economy. However to a large extent I think these purchases could be considered indirectly provoked by the Fed since its policies would have caused drastic currency appreciations in the absence of intervention of the foreign central banks, which in turn would have damaged their economies (Of course the purchase of U.S. government securities will also damage their economies but the point is
that it was provoked by the Fed's policies). So the main conclusion that the Fed is responsible for the housing bubble is valid.
Published: August 4, 2005 3:03 PM
Yes, there can. Why? Because savings is the equivalent of inflation. Consider this: If every American had a $100,000 in FDIC savings the net economic effect would be te same as no one having any savings EXCEPT with respect to foreign trade.
No, he said "real wealth". Suppose that, for every person in the world, a car magically appeared on their property. A naive economist might say, "Well since EVERYONE got one, there is no net economic effect." That might be true about fiat currency, like dollars, euros, etc. But this is a case of real wealth; each person received something they value. They can use the car to go from point A to point B, or if they don't want it, they can sell it to someone. The only situation in which a person's real wealth would not be increased is if the car was absolutely worthless to them (i.e. they have no use for it and they can't sell it to anyone else).
So, you can never have too much real wealth. The only way someone could have "enough" real wealth is if they have absolutely everything they could value. If there was nothing this person longed for, if there was nothing that could be invented or created that this person would desire, etc. Such a person does not exist (that I know of), so demand for real wealth is infinite.
Adding 100,000 dollars to EVERYONE's account would of course not do anything except maybe distort economic calculation as people struggled to adjust to the new price structure. But, of course, 100,000 dollars created out of thin air, is not real wealth...thus, it does not increase real savings.
Published: August 4, 2005 6:51 PM
I have no claim to be an economist. But I might be able to add something. In a precious metals monetary system without fractional reserve banking, geniune savings would be deflationary. By geniune savings I mean non-invested coin that is just sitting in a vault. Thus savings would be the means by which inflation is countered or the desired aggregate level of deflation is obtained. But this obviously is not what is occuring in our fiat fractional reserve system. Besides that small amount of currency that is removed from circulation by being stuffed in a mattress or buried in fruit jars, 'savings' is inflationary. As spoken of by others these deposits are lent out for either non-productive consumption or productive consumption. The more the productive the consumption, the less inflationary effect. In the reverse the less productive the consumption the greater the inflationary effect. To paraphrase the real growth of the economy counters the effect of the increase in the supply of money. More goods being chased by more dollars.
The cause of the inflationary effect of 'savings' appears to me to be the inversion of the nature or real savings. As spoken of by many others who are far well more informed, the long policy of easy money has caused money to be mal-invested in ever lessening levels productive consumption. Thus the ever greater inflation.
Published: August 5, 2005 8:59 PM
--"Given his libertarian, hard money past he undoubtedly understands what he is doing."
I've often wondered if Greenspan was trying to pull a Francisco d'Anconia...
Published: August 8, 2005 12:31 PM
8/12/05
Dear Frank,
Duncan in his current book "The Dollar Crisis" says that dollars from their balance of trade surplus which the world has with us which totals roughly 5% of our GNP. (Sorry. If can not use GNP, need some other yardstick from you when talking with the non Misean world)are purchased by the exporters' central banks who print their local countries' currency out of thin air to give to their exporters for the dollars so the exporters can continue to produce more to send us. (He also says this has been disaserous for the exporting countries with massive malinvestments, half the bank loans in China being non performing, etc.) The foreign central banks invest these dollars in US government debt or increasingly in debt of Fannie Mae, Freddie Mac, The Federal Home Loan Association, etc. These banks then lend these dollars to home owners who cash out their equity to buy vacations, fur coats, and buy more stuff from overseas. Thus, the foreign central banks with their mass of dollars are dramatically contributing to the asset bubbles in the US.
Bill Grant, Moderator, Sarasota Economics Club
Published: August 12, 2005 2:51 PM
8/12/05
Dear Frank,
Duncan in his current book "The Dollar Crisis" says that dollars from their balance of trade surplus which the world has with us which totals roughly 5% of our GNP. (Sorry. If can not use GNP, need some other yardstick from you when talking with the non Misean world)are purchased by the exporters' central banks who print their local countries' currency out of thin air to give to their exporters for the dollars so the exporters can continue to produce more to send us. (He also says this has been disaserous for the exporting countries with massive malinvestments, half the bank loans in China being non performing, etc.) The foreign central banks invest these dollars in US government debt or increasingly in debt of Fannie Mae, Freddie Mac, The Federal Home Loan Association, etc. These banks then lend these dollars to home owners who cash out their equity to buy vacations, fur coats, and buy more stuff from overseas. Thus, the foreign central banks with their mass of dollars are dramatically contributing to the asset bubbles in the US.
Bill Grant, Moderator, Sarasota Economics Club
Published: August 12, 2005 2:51 PM
You wrote that, "Duncan in his current book "The Dollar Crisis" says that dollars from their balance of trade surplus which the world has with us which totals roughly 5% of our GNP are purchased by the exporters' central banks who print their local countries' currency out of thin air to give to their exporters for the dollars so the exporters can continue to produce more to send us. (He also says this has been disaserous for the exporting countries with massive malinvestments, half the bank loans in China being non performing, etc.)".
I don’t have any problem with this. Just to add that the monetization of US dollars is caused by various central banks. They have always the option not to monetize, by withdrawing from the forex market.
The second part is however problematic. According to Duncan,
“The foreign central banks invest these dollars in US government debt or increasingly in debt of Fannie Mae, Freddie Mac, The Federal Home Loan
Association, etc. These banks then lend these dollars to home owners who cash out their equity to buy vacations, fur coats, and buy more stuff from overseas. Thus, the foreign central banks with their mass of dollars are dramatically contributing to the asset bubbles in the US�.
Foreign central banks receive already existing dollars i.e. old dollars so to speak. These existing dollars are just channelled to various assets in the US. This however, cannot create more US dollars. As a rule banks are always fully loaned - they always minimize on the reserves they hold. It follows that new money must be injected in order to set in motion the expansion of credit out of thin air (i.e. set in motion the credit multiplier). Only the Fed can make this happen i.e. pump new money into the system. ( Foreign central banks do not print US dollars).
In short, the existing pool of dollars is the outcome of past monetary pumping of the Fed. This pool of dollars, so to speak, has already gone
through the so-called credit multiplier process. All this means that foreign central banks do not make any contribution to the amount of dollars
and therefore cannot cause asset bubbles in the US.
All the best,
Frank Shostak
Published: August 14, 2005 3:45 PM
I thought that was an excellent answer. In the meantime, foreign central banks such as China's are busy creating their own domestic asset bubbles in their quest towards maintaining their peg to the steadily inflating USD.
Published: August 15, 2005 12:15 AM