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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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:

  • Gold - Ready to Spring Another Surprise
      Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.   Blackbeard's...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com