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Five Things You Need to Know: What Does "Global Saving Glut" Mean?; Why Does the "Global Saving Glut" Matter?; Didn't Get the Memo; Credit Card Debt Expanding; Point/Counterpoint: Should You Carry a Credit Card Balance?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Bernanke Speaks: What Does "Global Saving Glut" Mean?

Speaking this morning in Berlin, Federal Reserve Chairman Ben Bernanke said the "global saving glut" is helping to keep interest rates low and may not rise much even if the pool of excess capital declines in coming decades. We're going to hear the phrase "global saving glut" quite a bit for the rest of the week, so we might as well get clear on what Bernanke means by this.

  • Bernanke first raised the issue of a "global saving glut" in a March 2005 speech titled - incredibly - "The Global Saving Glut."
  • What is a global saving glut?
  • Because we are talking about macroeconomics, it is not what comes to mind when one takes the words "global" and "saving" and "glut," and puts them together.
  • For an economist that would be a foolish way to view "global saving glut" because it would violate one of the most important laws of economics, the Hyperobfuscation Law of Semiotic Vacancy.
  • So what does Bernanke mean by "global saving glut"?
  • He means, in large part, the net effect of the transformation of emerging market and oil-producing economies into large net lenders from net borrowers.
  • This is somewhat unique because, ordinarily, developed countries lend to emerging markets.
  • Think about it in real person terms. A college graduate often enters the work force with an account deficit due to, say, student loans. These people are a bit like emerging markets.
  • Perhaps they have skills that will one day allow them to run an account surplus, but until those skills become developed and their earning potential maximized, they are emerging.
  • In the case of the emerging economies of Asia and Middle East and former Soviet Union emerging economies, Bernanke says a variety of factors have occurred to transform those economies from net borrowers to net savers - and ironically, the beneficiary of that net saving has been developing countries where these emerging economies have invested, i.e. bought government bonds, and therefore kept interest rates low despite a substantial expansion in the U.S. current account deficit.

2. So Why Does the "Global Saving Glut" Matter?

The short answer is because, like the Bernanke Put that he unveiled back in May, the global saving glut matters because it positions the Federal Reserve and its actions as beyond reproach and utterly blameless for any negative effects of a decline in "the pool of excess capital" despite the fact the Federal Reserve built the pool, paid for the water to fill it and hired the maintenance and cleaning crew.

  • Bernanke's Berlin speech on the "Global Saving Glut" focuses on three things that he says demand explanation in light of the major expansion of the U.S. current account deficit between 1996-2004: 1) The substantial increase in the U.S. current account deficit, (2) the swing from moderate deficits to large surpluses in emerging-market countries, and (3) the significant decline in long-term real interest rates.
  • OK, but why should we care about this?
  • Lest anyone think the Federal Reserve operates above and beyond politicization, this speech is a great example of how a politician would seek to lay the groundwork for averting blame once the "excess pool of capital" (global liquidity" dries up.
  • How so?
  • First, there is the unspoken assumption that central bank policy between 1996-2004 was "business as usual."
  • It was not, not by a long shot. Credit creation by the Fed during that span was record-breaking, eclipsed only by the amount of credit creation that has occurred since then.
  • According to Bernanke, a key issue is whether the decline in the realized saving rate in the United States reflects a decline in desired saving or was instead a response to other, possibly external, economic developments.
  • Why not internal developments?
  • Because those have already been dismissed out of hand.
  • Bernanke says, "In fact, there is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period."
  • Yes there is. It's right here.

3. Didn't Get the Memo

Three senior Federal Reserve officials said on Monday that the turmoil in housing and mortgage lending had begun to threaten the overall economy, the New York Times reported.

  • Fed governor, Frederic S. Mishkin, said that the risk of a broader downturn "cannot, in my view, be ruled out" and "poses an important downside risk to economic activity," the Times reported.
  • Janet Yellen, president of the Federal Reserve Bank of San Francisco, said that the housing decline would probably continue and would impose "significant downward pressure" on consumer spending.
  • And Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said that an unexpectedly bleak unemployment report this past Friday had made him more worried about a downturn, despite having said only the day before the employment report that he had not seen any "conclusive signs of weakness in the broader economy," the Times reported.

4. Credit Card Debt Expanding

Yesterday afternoon consumer credit numbers were released. Consumer credit outstanding expanded by a slightly lower than expected $7.5 billion in July, from a downwardly revised $11.9 billion in June. June was originally $13.2 billion. Is this good, bad or indifferent?

  • First, we look at the main driver of the expansion: revolving credit, or credit cards.
  • Revolving credit rose by $5 billion, double the growth in non-revolving credit, and is running at 6.6% year-over-year pace.
  • What's the big deal:
  • Well, consider that, according to Mintel International Group, direct mail credit card offers to subprime customers in the United States jumped 41% in the first half of this year, compared with the first half of 2006.
  • Meanwhile, direct mail offers targeted at customers with the best credit fell more than 13%.
  • Incredibly, this was occurring even as subprime mortgage defaults were skyrocketing.
  • But that's not all, even as the pace of subprime mortgage defaults has continued to expand, thus removing an important level of credit access (the home) from available options, credit card outstanding balances have grown at an 8% rate in just the past three months.
  • In other words, it is likely that consumers are turning to credit cards to fund consumption and access credit.

5. Point/Counterpoint: Should You Carry a Credit Card Balance?

Above we discussed credit card balance growth. This raises the question: is that so bad? Should you carry a credit card balance? To discuss this important topic we turn to another Minyanville Edition of Point/Counterpoint.

Should You Carry a Credit Card Balance?

Carrying a Credit Card Balance Is No Big Deal

By Carrington Potter Brown-Huffington

I confess. I carry a credit card balance each month. But it's not what you think! My husband, Ashley, and I have sterling credit, and therefore pay only a low, low super-platinum prime annual interest rate of 3.99%. We carry a credit card balance each month, but instead of working to pay that balance down, our balance works to pay us!

How does that work? Let me explain.

We typically borrow against one of our platinum cards with a $400,000 limit, and reinvest the money in a higher-yielding money market account that pays 4.5% interest, therefore earning a convenient spread. Isn't it wonderful? And think of the frequent flier miles we earn! One mile for every dollar used - $400,000 limit? You do the math!

Last March we flew to Tuscany - just to visit a little vineyard we own there - and the airfare was entirely free thanks to the mileage we earned while using one of our credit cards. Plus, we used the money we earned on the spread to finance the entire trip. Essentially, our credit cards pay us to travel! Isn't it marvelous? Why work for your money when you can make your money work for you?

That's Strange, I Mailed in That Payment Weeks Ago

By Eric Jones

So you really didn't get that check, huh? That's really strange, because I mailed it in weeks ago. Priority mail too. Wow. Weird. The worst part was that it was for the full $28,454.72 MasterCard balance. No, I understand completely. You're running a business. Ok, so... huh... I'm just trying to figure out what to do here. Should I overnight another check? Because I could do that. Or how about this. Just hear me out for a minute. How about you guys go ahead and just, I don't know, just maybe turn the credit card back on... wait, just, just let me finish... so you guys would turn the card back on so I could use it for, uh, my business, and then I would send in two checks in two separate envelopes, one for the whole balance, the whole thing, $28,454.72 and... ok, right, with the late fees and extra interest that would come to $29,103.56, OK, no problem, just writing that down on the check right... now... so I'll send in this check here in my hand right now for the whole balance and in an entirely different envelope I will send in what we'll call a "Safety Check" for the minimum payment of $45... you know, just in case the check for the whole balance gets lost again. Haha five times! Five times that check has somehow disappeared at the post office. What do those people do down there, throw the credit card payments in a special box and burn them? Haha. It's really weird. Oh, OK, no, I understand. Then I'll just go ahead and send in a check and when you get it you can turn the card back on.

No positions in stocks mentioned.

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