Best of 2005: Savings Glut
Editor's Note: This article was published on 6/23/2005
We are constantly being told by the Fed that there is a "savings glut" in the rest of the world. If we listen to them, we picture millions of people in Asia with bank accounts brimming full of Yen or Yuan imprudently refusing to spend it. According to our "leaders", it is perfectly natural and indeed necessary then for the U.S. consumer to "borrow" those "savings" at their low interest rates and invest or spend it to "correct" this "over-saving" and drive the world economy.
There is no imbalance or inherent instability with chronic trade deficits because they are simply the result of Asian savings just waiting to be "used". If it weren't for the U.S. consumer's propensity to spend and speculate, the world economy would be in terrible shape.
I would call this propaganda if it wasn't pure bunk.
In reality of course there are no such accounts brimming with "savings". The first clue that this characterization of what is happening is a lie is the fact that central bank (public) debt and yearly deficits are rising rapidly for all countries (government debt in Japan has increased by 50% since 2001).
Before 2001 we had an economy somewhat reeling from the stock market correction and an already over-active Fed dealing with the folly of its own policies. Add to that the economic impact of the terrorist attack in 2001 and we got a Fed that went into over-drive. Deflationary forces as a result of world-wide manufacturing over-capacity were blamed on "the new world after 2001" and all the stops were pulled.
The Fed in coordinated actions with Japan's central bank engineered the last bubble, a housing boom, to pull the economies of the world up by their bootstraps. The significant consequences of this strategy would be dealt with later (as seems to be the now permanent political and economic mindset); for now it was "bail the water out of the boat".
The Fed began to inject vast amounts of liquidity into the system, printing money and lowering short term interest rates in order to spur the U.S. consumer. The problem with this would be that printing enough money would cause bonds to get nervous (bond holders do not like getting paid off in less valuable dollars) and would eventually drive long rates higher and "really kill the economy".
Enter the bank of Japan. As consumers in the U.S. re-financed their homes at lower rates, this freed up large amounts of capital for them to spend on cars and houses and such. We bought those cars from Japan (think China too for lots of other stuff), sending our dollars over there. Japanese businesses turned those dollars over to the BOJ and the BOJ in a normal world would sell those dollars into the market for Yen to give in exchange back to Japanese businesses. This would drive up U.S. interest rates as the dollar fell precipitously.
Instead, Japan took those dollars and bought U.S. government securities with them. In order to give those Japanese businesses their Yen they PRINTED it.
This printing of Yen is what is referred to by the Fed as "savings". But the printing of currency by both the U.S. and Japan (and China) is not savings. As countries print money they do so by issuing debt.
When a person borrows money and puts that money into a savings account, their net worth does not increase. When a person buys an asset with that money and the price of the asset increases, their net worth does increase but only on paper. This paper increase in net worth is the wealth effect and is driving peoples' psychology to spend and speculate more.
This cycle must end at some point. The world cannot continue to print fiat currency and expect the resulting increase in debt not to have significant consequences. Paul Volker and others like him are on record stating it must end soon before it is too late. We are already seeing the effect of this huge debt as it slows the velocity of money and it may already be too late.
The Fed needs to come clean. They need to continue to raise interest rates and stop this cycle before it is too late. We are already seeing signs that the velocity of money is slowing (because of too much debt) to the point where any increases in the supply of money is being completely offset.
There are no "savings", only debt.
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