Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive.
Indeed, the entire Savings Glut meme is more of a semantic game than anything else. In the hands of lesser proponents than Bernanke (and Columbia Prof /Clinton Group Economist Richard Clarida), it might appear to be intellectually dishonest; By saying it fails intellectually, I am being "generous" by giving both men the benefit of the doubt.
Everytime I hear the "Savings Glut" phrase, I cannot help but be reminded of Mr. Montgomery C. Burns of Simpsons fame:
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"Oh, meltdown. it’s one of those annoying “buzzwords." We prefer
to call it an unrequested fission surplus."
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You read that right: macro-economic analysis via the Simpsons. Here’s how Monty would break it down:
Unrequested fission surplus = Nuclear Meltdown (Buzzword)
Savings Glut = trade deficit, current account deficit, federal budget deficit, zero savings rate (more Buzzwords)
Dan Gross, who’s financial columns are consistently amongst the most thought provoking and interesting I read today, gets
the reasons for the structural global imbalances exactly right:
"Why are there imbalances in the global economy? Until recently, conventional economic wisdom has held that the U.S. has a huge trade deficit, a gaping current account deficit, and large federal budget deficits because Americans consume too much and save very little.
In Gross’ view, the Glut is a self-serving explanation for all of America’s bad habits.
Hence, my own thoughts that this is as much semantics as it is economic theory. While that helps settle the issue for me, others may want some more details:
1) The Savings Glut argument is a defense of a
structural imbalance via a mostly painless solution, rather than the difficult
medicine (most adults) know are necessary to cure the problem. A spoonful of Sugar won’t help eliminate the problem.2) Much of the rest of the world has very different priorities and social structures — they often look askance at what is called "excessive consumption" in the U.S.
Consider Europe: Their culture has much longer vacation time than the U.S., shorter
working week (by hours), and much of the Summer off. While they have their moments, they are not remotely the consumer
society we are. For us to suggest that Europeans need to start consuming much more
stuff only reflects an unrealistic understanding of the Continent; That’s why it generates guffaws;3) The US savings rate is almost nonexistent; I find it exceedingly difficult
for us as a stone cold drunk to lecture others on the virtues of either fine wine or being a teetotaller;4) Then there’s the "careful what you wish for" factor: What would
happen if the rest of the world suddenly decided to go on a spending spree,
racking up big debts, rather than buying our bonds?
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See also: Brad Setser has a robust critique of the Bernanke global savings glut speech. Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut is a self-serving explanation for America’s bad habits, Setser goes on to list 5 major criticisms of the Savings Glut theory. The two nice things he said was little more than a polite coda, IMHO
“4) Then there’s the “careful what you wish for” factor: What would happen if the rest of the world suddenly decided to go on a spending spree…”
Or the flip side: what would happen to the rest of the world if we decided to stop being drunken consumers and instead went on he wagon?
Spending or savings glut?
I’m highly skeptical that our planet could support Asia spending/consuming at the same rate and in the same fashion as North Americans are doing today without major pollution or strain on natural resources.
I think it’s more of a spending issue.
As far as I can tell, the savings glut theory isn’t about the U.S. so much as it is an attempt to figure out, given all the financial red flags, why the rest of the world is continuing to lend to us on such favorable terms.
The rational choice, it seems, would be to limit exposure rather than giving carte blanche to the 900lb deadbeat. But that’s not what’s happening.
In contrast, why the U.S. is turning so piggy and irresponsible isn’t an interesting question economically.
The Answer being because competent stewardship of the economy is not a priority of the people in charge of this country, so they ‘rationally’ put their efforts elsewhere and devote little thought as to the economic ramification of their actions.
Nobody expects the current crew to find their way back to fiscal sanity, so figuring out when/how the carte blanche will get revoked (and what to do about it then) is the logical path to follow.
You say, “What would happen if the rest of the world suddenly decided to go on a spending spree, racking up big debts, rather than buying our bonds?”
Well, as Warren Buffett pointed out in FORTUNE awhile ago, the rest of the world must want our dollars. When they get those dollars they only have two choices: buy goods from us or buy assets. THEY HAVE NO OTHER CHOICES!!!
Some say, “They’ll dump our dollars.” But then someone else will have our dollars and they will now have the same decision to make, goods or assets.
Can someone refute this?
Norman:
Unless Buffett has changed his position recently you’ve reversed his basic position to justify your own. He has been a bear on dollars which means that he thinks their value will fall. Too much supply, too little demand. That’s what happens when people start unloading.
Your position reminds me of a position that certain yuppies were taking in the eighties. They called it “conservation of money” and used this quasi physics analogy to explain money could never go away because it would always be pased to somebody. Philosophically this is called “idealism” or “rationalism,” you build a model and think it explains reality.
Empiricism is a good modifier, for “conservation of money” think the Great Depression, for your idea that the dollar must retain it’s value because somebody must want it, think of all the currencies that have fallen.
Strategically I feel that we are potentially in really big trouble. Recession or possibly stagflation or even simple daily living inflation can cause things like real estate and equities to fall. At that point an increasing volume of those foreign dollars can be shifted from bonds to tangible assets. And taking them out will raise the cost of living and weaken the economy causing the value of tangible assets to fall further. This means that while a dollar will buy less and less car it will buy more and more of an American auto company, if anyone actually wants such a thing.
Such a development is consistent with the old fashioned view of wealth much of the world holds so we are placing a lot of faith in the new fangled conceptions.
And of course it will be Bill Clinton’s fault. If we’d just had more tax cuts then all would have been well.
Does Switzerland, with its internationally recognised banking system, regularly wring its hands that people from foreign countries decide to store their wealth there? No.
The world sees the US Treasury as a stable, safe international bank. This has nothing to do with our trade balance, and everything to do with our remoteness from the wars of the world and the rule of law and honesty in our country.
This has created some paradoxal situations. When we declared war on Iraq, Iraqis and other arab states started converting their savings into dollars. Iraqis knew US dollars would still exist after the war with the US was over. But would Iraqi dinars after Baghdad fell? How likely were the bank officals to not just raid the money and run themselves? And would you bet your fortune on that?
There is one theory that all those Cayman Island off-shore banks so heavily invested in the US Treasury are Iraqis and other arabs who have converted their local cash to US dollars for stability but are using off-shore banks to avoid the risk of asset seizure by the FBI. That’s pretty plausable to me.
Likewise why are Chinese officals taking Yuan from their own people and then storing it in US Treasury notes instead of in their own local national banks? Because US banks are solid and do not steal from account holders… unlike local Chinese banks.
$100 US bills are the standard currency of exchange for smugglers and black markets the world over. (Which is somewhat ironic since $50 bills and larger are usually frowned upon in domestic US use, and most citizens only use $20 bills day to day) It should not be surprising that the grey and even white markets also prefer US currency.
It’s about the strength of our laws and the honesty of our people.
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BR: HAHAHAHAH LOL hee hee hee . . . oh, wait — you were serious . . . ?
>BR: HAHAHAHAH LOL hee hee hee . . . oh, wait — you were serious . . . ?
Sadly, yes. Ever pay for a container of t-shirts, pants or shoes from a off-shore garment factory and get an empty crate, or better yet a crate of rocks that matches the expected filled container weight? Happens all the frickin time. And these are the factory owners. Ripping eachother off is just part of doing business for these folks.
Or better yet, try explaining to people in even the second world why Enron was illegal. Or why Martha Stewart went to jail for lying under oath. You’ll waste your breath. Every one of them sees ripping off other people at the first opportunity as business standard.
P. J. O’Rourke’s “Holidays in Hell” made this point years ago. And he was dead on in my experience.
“3) The US savings rate is almost nonexistent; I find it exceedingly difficult for us as a stone cold drunk to lecture others on the virtues of either fine wine or being a teetotaller;”
i hear this alot and i am wondering if home ownership is included when calculating US savings.
“Their culture has much longer vacation time than the U.S., shorter working week (by hours), and much of the Summer off. While they have their moments, they are not remotely the consumer society we are. For us to suggest that Europeans need to start consuming much more stuff only reflects an unrealistic understanding of the Continent; That’s why it generates guffaws;”
also i noticed that you did not mention that much of Europe also have high spending deficits when conpared to thier GDP
If inflation goes up, will it not be good for US companies because they will be able to raise prices and dollar value of their revenues and income will go up?
“3) The US savings rate is almost nonexistent; I find it exceedingly difficult for us as a stone cold drunk to lecture others on the virtues of either fine wine or being a teetotaller;
i hear this alot and i am wondering if home ownership is included when calculating US savings.”
And I like to add stock ownership via 401K and other pension investments.
“Philosophically this is called “idealism” or “rationalism,” you build a model and think it explains reality.”
Thank you for the best definition of modern day liberalism I’ve come across yet.
And Hmm, seems those tax cuts has had the desired effects, namely higher revenues the past two years than at any time during the Clinton “boom”. But heh, its your model.
Do not mix Apples and Oranges: There is a difference between the category “Savings” and the one called “Investments.”
To oversimplify: Savings are liquid vehicles that can be converted into cash within 24 hours at or near their original price. This includes savings or passbook accounts, moneymarket funds, even CDs.
Anything else that has a value subject to market forces — stocks, bonds, gold, even real estate — is comsidered under the heading Investments.
The differences are twofold: the expected (predicted) value in the event of an emergency, i.e., recession/job loss/market crash — when the savings wmight be needed for living expenses and liquidity.
The savings ratio does not measure savings per se, it is a flow measure and has well documented flaws to do with treatment of capital gains, consumer durables etc. Not flaws for what it is supposed to measure but for what most use it for – some proxy of the wisdom of the US household. As with a company, we need to look at the balance sheet as well, and here, household wealth, the imbalances story runs into some trouble. There is no shortage of savings in the US and no shortage of capital. Outside of the US there is a demographic and structural need to provide for future consumption through low risk high(er) yielding products. The US is selling these faster than it is creating them (ie it is not borrowing per se) so the price of US bonds is rising. It is simultaneously investing in higher risk assets overseas and at home. Traditional economics or accounting does not reflect this risk profile or expected returns. The debt and debt payments are fixed, the equity and dividend payments are expected to be rising. Yet most commentary assumes debt to rise with no increase in assets. When the rest of the world has its balance sheet sorted, it will save less – probably by borrowing more to buy houses, esp in China – and spend more. The capital account surplus will shrink and so will the current account deficit. This does not necessarily mean a collapse in either the bond market or the $ – but that rather gets in the way of the bond/currency strategist’s “story”.
Everyone credits Bernanke with the savings glut thesis.
But I first read about the idea from Harry Shutt’s book, “The Trouble With Capitalism : An Enquiry into the Causes of Global Economic Failure” (Zed Books, 1998).
His theme (as I recall) was global growth has led to excess capacity, dwindling returns, an investment deficit and consequently a savings glut.
Savings are liquid vehicles that can be converted into cash within 24 hours at or near their original price. This includes savings or passbook accounts, moneymarket funds, even CDs.
Perhaps I should direct you to lending tree or the other 100 lending web sites that will lend you money against your house in maybe not 24 hours but purhaps 72 hours. Your local bank could be even faster…then again you could have set up a credit account in the first place that would be easier to set up then passbook account or a moneymarket fund.
One other note americans don’t save up and then use the money to open a small buisness…they buy a house pay off some of the principle then use that value to get a loan to fund thier small enterprise.
It seems to me your biggest critisism of american saving habits is that they don’t give thier money to someone else to invest, rather they invest it themselves in markets they know and understand.
A situation that could hardly be critisized as unstable or harmful to the economy.