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The Great Savings Glut

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It looks like savings, but where do you see it?

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Savings, what is left over after consumers spend after-tax income, are held in the system and lent out to borrowers. It used to be that the amount lent out was dependent on savings. This kept debt under control.

Long-term bond yields were very stable as a result. Of course this all happened before central banks went off the gold standard. This freed them up to print currency to lend out. They could just produce available funds out of thin air.

Of course today Asian consumers save more than U.S. consumers, but that is not saying much since the U.S. savings rate is now negative. Consumers in the U.S. on average now spend more than their after-tax income.

Our new Fed chairman says that is OK because we just borrow from those silly Japanese consumers who save way too much, thus doing the world a favor. They are just too thrifty.

But let me ask you, does it make sense that if the Japanese consumer is so thrifty, so conservative where they won't spend their savings, that they would then lend it out to a basically bankrupt U.S. consumer at very low rates?

Even if they did there is nowhere near enough real savings to satisfy our borrowing appetite.

Logic tells us that there is something very different going on. The following diagram Illustrates what is really happening: in a world where central banks have no restrictions, they can make printing money look like savings. The only difference is that printing money produces debt.

So there is no savings glut. The U.S. is borrowing created money as the world prints currency.

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