Can Saving Possibly “Undermine Economic Growth”?

In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested  that a visible decline in the natural interest rate in the US could be on account of the world glut of saving.

 

fisherStanley Fischer points out where the imaginary savings glut he believes to have spotted is hiding.

Photo credit: Jim Watson / APA / AFP

 

According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest. For Fisher and other commentators this could signify that the economy might have fallen into a situation where increased saving undermines the economic growth

Most economists are in agreement that in order to grow an economy, saving is a must. It is saving that funds investment in capital goods like computers, tools, and machinery, which in turn, make the economy more productive. It is argued that, while saving plays an important role in growing an economy, sometimes too much saving can actually be a bad thing.

For instance, it is held that if consumer demand is weak, then more savings will only undermine consumer expenditure and weaken economic growth. After all, it is held, the motor of the economy is consumer expenditure and saving is the opposite of consumption.

According to this way of thinking, if people decide on saving a large proportion of their income, then only a small quantity of output will find a market. Output will have to be low because there will be no demand for larger quantities of production.

Also, it is held that while saving may pave the road to riches for an individual, if the nation as a whole decides to save more, the result may be poverty for all.

 

1-natural-interest-rateThe supposed natural interest rate – unfortunately, it is actually impossible to measure and isolate the level of the natural rate, so even if we assume it to be true that it has decreased, this chart is actually bogus. Note also that according to this chart, the natural rate was negative at some point. This is simply impossible. While gross market interest rates in the form of bond yields can indeed fall into negative territory, the natural rate can never be zero or negative – not as long as time passes for all of us, and there is a sooner and a later – click to enlarge.

 

What Is Saving?

If John the baker produces ten loaves of bread and consumes two loaves his savings is eight loaves of bread. The baker’s savings is his production of bread minus the amount of bread that he consumed.

The baker’s saving now permits him to secure other goods and services. For instance, he can now exchange his saved bread for other consumer goods or he can exchange it for oven parts and tools. By exchanging his bread for other consumer goods, the baker can expand the variety of final goods that he can consume at present.

The exchange of his saved bread for oven parts and tools will enable the baker to enhance the oven, which, in turn, will make it possible for him to raise the quality and the quantity of the production of bread.

Note that it is the bakers’ decision that determines how much of his stock of saved bread will be allocated for his personal consumption and how much allocated toward the buying of oven parts and tools.

 

bakers-at-workBakers hard at work. If they keep this up, they will soon have enough bread to exchange it for tools. This will sustain the life and well-being of assorted tool makers.

 

Also, note that by exchanging his saved bread for oven parts and tools, the baker transfers his saved bread to the producers of parts and tools. The bread, coupled with other final consumer goods, maintains these producers’ lives and well being and allows them to continue in their production activities.

Observe that saving here supports the consumption of the baker and the producers of parts and tools. Also, note that when the baker exchanges his saving for final consumer goods and for tools and parts, he pays for them with his savings. His means of payments are saved loaves of bread.

 

Is It Possible to Have Too Much Saving?

This is like asking if we can 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.

Saving can never be bad for economic growth. Furthermore, as we have seen, saving is entirely absorbed in the consumption of the producers of final consumer goods and the producers of tools and machinery, i.e., capital goods producers.

So, if saving is the key for wealth generation, then it is absurd to suggest that it may be good for individuals but not necessarily good for the nation as a whole. Since a nation without individuals doesn’t exist, saving being good for individuals must be also good for the nation.

 

Feel free to use this image, just link to www.SeniorLiving.OrgAccording to Fischer, Bernanke, Yellen et al., this is simply too much! Evil savers are dragging down the economy and need to be punished! As Martin Wolf, chief economics commentator of the FT once averred verbatim: “Cautious savers no longer serve a useful economic purpose. Wipe out rentiers with cheap money”. This is what passes for economic science nowadays!

Photo credit:  Senior Living

 

What about the commonly accepted view that the driving force of an economy is consumer demand for goods and services? In this way of thinking, what poses a threat to economic activity is the scarcity of demand. There is, however, never a problem with demand. What always matters is having enough means to support demand.

 

There is not too much Saving – There is too much Money Creation

Let us now examine the effect of monetary expansion on the pool of real savings. The expanded money supply was never earned, i.e., goods and services do not back it up, so to speak—it was created out of “thin air.” When such money is exchanged for goods it amounts to consumption that is not supported by production.

Consequently, a holder of honest money, i.e., an individual who has produced real wealth that wants to exercise his claim over goods, discovers that he cannot get back all the goods he previously produced and exchanged for money.

 

2-tms-2-and-bank-creditThe broad true US money supply TMS-2 and total bank credit outstanding. Society as a whole has not become “richer” by one iota on account of the money supply having been boosted to such an astonishing extent – however, the distribution of real wealth has certainly changed as a result. No-one should be surprised about the incessant complaints over growing wealth inequality – it is a direct result of monetary pumping – click to enlarge.

 

He discovers that the purchasing power of his money has fallen. The printing of money undermines wealth generators and thereby weakens the pool of real savings over time. (By being now poorer wealth generators can afford fewer saving than before — their time preferences are likely to increase.)

In a world without central banks and fractional reserve banking the difference between money income and monetary expenditure on consumer goods, i.e., monetary saving will be a true reflection of the state of savings.

This is not going to be so in the world where money is generated out of “thin air.” In this case an increase in the difference between the money income (on account of an increase in money supply) for a given amount of monetary expenditure on consumer goods shouldn’t be regarded as an increase in saving. In fact such an increase should be regarded as bad news for the process of real wealth formation and the pool of real savings.

Now, the pronouncements of various Fed officials such as Stanley Fischer and the former Fed Chairman Ben Bernanke that  a downtrend in the natural interest rate,  among other factors, is on account of a strong increase in savings are questionable . We suggest, that this downtrend is not on account of a glut of saving but on account of the Fed’s policy of monetary pumping and tampering with interest rates in order to bring the economy onto an imaginary growth path of price stability.

Note that the Fed has been aggressively lowering its policy interest rate since May 1981. The federal funds rate target was lowered from 19% in May 1981 to 0.5% by June this year. In response to the Fed’s loose monetary stance our monetary measure (AMS) increased by 882% between May 1981 to June 2016.

 

3-money-amsA long term chart of Money AMS (the Adjusted Money Supply, a measure of the narrow US money supply in accordance with Austrian monetary theory). The amount of money in the economy has soared in recent decades. When a truckload of additional “money” is printed every year, it does not equate to an increase in savings. It only means that the money supply has increased. Ben Bernanke and many other mainstream economists are constantly confusing real savings with imaginary numbers in bank accounts – click to enlarge.

 

Conclusion

A possibility that the US economy might have fallen into a situation where loose monetary policy couldn’t “revive” economic activity any longer could be indicative that the pool of real wealth and the pool of real savings are in serious trouble.

A massive monetary explosion since the early 1980s on account of the onset of financial deregulation has likely severely undermined the process of real wealth formation.

So from this perspective it is quite possible that the US economy might be in a phase of prolonged subdued economic growth. Again this is not on account of too much savings but on account of too much monetary pumping.

To revive the economy what is required is not to increase government outlays in order to lift the aggregate demand as suggested by many experts. What is required is to actually drastically reduce government outlays and the Fed’s activities in financial markets. This will provide more scope for the private sector to get on with the business of real wealth generation and to meaningfully revive the economy.

 

Charts by AASE (Applied Austrian School Economics), St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

This article was originally published at the Mises Institute.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “Is there a Savings Glut?”

  • Hans:

    “According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest.”

    If this is the actual case, then there is no need to the FRB to manipulate
    interest rates. Just more nonsense and model theories from a Fedman.

  • Bogwood:

    Are there any biophysical Austrian economists out there? They might come to similar conclusions by a different path. Savings would not be the eight surplus loaves, but the 1-2 loaves put aside for the seven lean years. But putting “loaves” aside for years, is difficult, other species cannot do it and easily go extinct. A bear puts on fat for the winter, like an islander storing fat on her body for the droughts,short term stuff. Or a hunter-gatherer storing his mastodon catch in the bodies of his tribe. The cost of storage, in the real world, easily leads to negative rates. Only the virtual world pays interest. Thus ancient laws against lending. If it doesn’t rot or rust it is not savings.

    The current hybrid virtual/real world is drawing down natural capital and calling it interest. Printing money does temporarily allow those capital resources to be drawn upon more quickly. We have consumed future centuries of stored energy in a few years. There are,for practical purposes almost no real savings, grain in storage is seven months not seven years. Even silver and gold work as “savings” only if someone is putting aside something real in the the large mysterious temple on the hill. So there does seem to be an excess of virtual savings, an interesting illusion conjured up by the high priests. It would be less dangerous if the illusion was not global.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist