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The Global Savings Glut that will not die

by marco Mon Aug 24th, 2015 at 08:32:42 AM EST

Also sprach Krugman:

... More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a "global saving glut": a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns. He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. (Some of us did.) But his suggestion that the U.S. housing boom was in part caused by weakness in foreign economies still looks valid.


What's causing this global glut? Probably a mix of factors. Population growth is slowing worldwide, and for all the hype about the latest technology, it doesn't seem to be creating either surging productivity or a lot of demand for business investment. The ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem. And low inflation around the world, which means low interest rates even when economies are booming, has reduced the room to cut rates when economies slump.

Back in 2008, Migeru wrote a pretty intense diary about the global savings glut theory.  Both it and the ensuing comments were generally beyond my comprehension.  But the sense I got was that most people were not too persuaded by the global savings glut theory, while it had already won me over when I first learned about it as The Giant Pool of Money on one of the most popular episodes ever of This American Life.

Won't comment more on this other than to ask whether the focus on China then could at all be related -- upside-down -- to the focus on China now.

[editor's note, by Migeru] Previous ET content on the savings glut theory

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"excessive wage restraint". Individual capitalists and industrialists are better off if they can avoid paying their workers much. But one industrialists salary expenses is the customer base of everyone else, so if they all manage to keep wages down, demand is choked to death.

In an innovative display of collective action that harms the collective, the employers of the world have been collectively working to push wages downwards, because obviously if its a good idea for each of them individually, it must be a good idea for society and the economy in general, right?

.. WRONG.

It's like the whole "whats the matter with kansas" problem, except the people standing in a circle machine gunning everyone's feet are supposed to be the cream of society. It's depressing.  

by Thomas on Mon Aug 24th, 2015 at 11:02:59 AM EST
I am quite confident of this theory as it applies to Germany, and China, because those are the places with the really noxious mismatches between productivity numbers and wages. Less certain this is the core problem elsewhere, but as a percentage of gdp, wages are frighteningly low in a lot of places.
by Thomas on Mon Aug 24th, 2015 at 11:06:38 AM EST
Its certainly has a substantial role in the US, where all growth since the 90's have gone to the top 10% ... and a large bulk of it to the top 0.1% ... and the refusal to grow the economy because strong growth would lead to strong labor markets results in massive international imbalances when combined with other countries that insist on pursuing strong growth policies.

The "savings glut" theory is an effort to distract from the real sources of those imbalances by pointing to a consequence as if it is a root cause.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 25th, 2015 at 12:38:19 PM EST
[ Parent ]
Just re-read my own "intense" diary from 2008 and the comment thread. I think it's an interesting case study of why you need sector-balance analysis, which took us about two more years to discover on this blog...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Aug 24th, 2015 at 12:16:32 PM EST
it's an interesting case study of why you need sector-balance analysis

Is that this?  Could you elaborate?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Mon Aug 24th, 2015 at 10:52:55 PM EST
[ Parent ]
The three sectors ... external, domestic private, and domestic public ... have to add up to zero. So what is critical is the direction of cause and effect, and mainstream economics is focused upon telling a "micro-founded" story of cause and effect in which the real causes are in theory ineffective, and so their real effects instead have "micro" level causes.

So, the US suppress worker wages, which suppresses income-financed consumption. The US progressively eases restrictions on debt creation, directly in support of the transactions income from debt creation to the political donors on Wall Street. Indirectly, this leads to trade deficits, which help sustain trade surpluses in China. The trade surpluses in China combined with government policies pursuing high rates of investment require high rates of saving.

Flip around cause and effect, pretend that the high rates of saving in China are a cause rather than an effect in the triple balances, and now the trade deficit is "China's fault", and pursuing balanced trade now requires suppressing wages.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 25th, 2015 at 12:52:13 PM EST
[ Parent ]
BruceMcF:
the US suppress worker wages, which suppresses income-financed consumption... Indirectly, this leads to trade deficits

But what makes the difference between US domestic demand suppression and German, that leads to a trade surplus?

I used to be afew. I'm still not many.

by john_evans (john(dot)evans(dot)et(at)gmail(dot)com) on Fri Aug 28th, 2015 at 05:20:41 AM EST
[ Parent ]
Wage suppression + productivity advances lead to a shortage of demand - the nation isn't paying workers enough that they can afford to buy the products, experiences and services those same workers can produce. In a closed system, this would very quickly lead to an economic death spiral as surplus workers are fired leading to even lower demand, ect.

 Germany is avoiding.. well, really, postponing. that problem taking a really insane percentage of the output of German workers, putting it in shipping containers and sending it abroad - not in trade for other goods, because imports are sinful, you know, but essentially to keep people working. just.. because.

The US mechanism of postponement has been to finance the consumption via debt. Instead of paying workers enough to fully mobilize the means of production, the labor force gets a credit line. This results in imports because a lot of said credit is foreign.

by Thomas on Fri Aug 28th, 2015 at 08:22:56 AM EST
[ Parent ]
Yes, the Germans constructed a system to create the credit for intra-EU exports, boosting German exports without raising it's FXR, because its maintaining an artificially low FXR by having countries like Greece in the Eurozone.

Since the FXR rigging is via building a (broken) monetary union instead of by active intervention, the objections to Asian neo-mercantilism are thereby ducked.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Aug 28th, 2015 at 10:16:35 AM EST
[ Parent ]
(W)hat makes the difference between US domestic demand suppression and German, that leads to a trade surplus?

In the US elites who had captured control of government proceeded to maximize their persona revenue without regard for the impact on the overall economy because they could. Manufacturing was "offshored" far beyond the ability of the remaining manufacturing sector and other sectors to produce even a neutral trade balance. Germany seems to have acted much more responsibly and with careful attention to trade balances.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 28th, 2015 at 12:32:03 PM EST
[ Parent ]
Michael Pettis on China

In an essay dealing with coverage of international economics entitled Michael Pettis: China's Economy, Internal And External Balance, Pettis compares his own approach In The Great Rebalancing to that of another author, Peter Timis' The Leaderless Economy:

Both books analyze the global economy in pretty much the same way, as an economic system in which any country's domestic economy is inextricably linked to other economies through the balance of payments mechanisms. The ability to place events within their global context is consequently crucially important in understanding any country's economic performance, but actually doing so tends more to be the exception than the rule.
....
The Leaderless Economy makes the same point I try to make in The Great Rebalancing: the economic analysis of any country is largely useless if it ignores, or treats as a minor issue, links with the external sector - i.e. other countries - and this is even more true today than in the past. Even something as important, and as seemingly "domestic", as the US savings rate (which for most people is assumed largely to reflect cultural preferences towards thrift among American households) is not determined primarily by American households but rather by its links with savings distortions abroad.
This might seem a profoundly counterintuitive statement, but in fact you only need to understand two or three accounting identities to be able to work logically through the explanation. I showed why one country's savings rate is as likely to be determined by domestic distortions as it is by distortions abroad in a blog entry on whether a savings glut must cause global savings to rise. In another blog entry, I explained why a low savings rate in countries like Spain was a necessary outcome of policies in Germany that effectively restricted wage growth. And finally I showed how - because of the role of the dollar in reserve accumulation and, more generally, the unrestricted ability of foreigners to buy US assets - the US savings rate is determined largely as a residual needed to balance net capital flows, in a blog entry on the so-called exorbitant privilege...

I could not agree more. Between the two quoted sections is a very cogent example of just how important this relationship is. The effects of international trade on one country's economy could be seen as the combination of the three sector accounting identity for each country linked to the other countries through the import/export terms. (Another example is all of the history I read before becoming modestly economically literate.)  :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 29th, 2015 at 11:15:19 AM EST
[ Parent ]
Ironically, China appears to be "dumping" its savings in US treasuries: $106 billion in the last two weeks, roughly just as much as this year before. Some tug-of-war going on? What purposes?
by das monde on Wed Aug 26th, 2015 at 03:56:12 AM EST
There's always a flight to security after a stock market crash ... I don't know what else there is to explain.

There doesn't need to be an interest rate return when its a winning bet either way ... either the RMB drops against the dollar and there is a FOREX profit on the US treasuries, or else the Chinese economy strengthens, the RMB stays the same and rises, and then the losses on the FOREX are offset by gains in doing business in the Chinese economy.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 26th, 2015 at 05:41:01 PM EST
[ Parent ]
I am talking about action of a single agent - the Chinese government. Its role is very different than running for security. China is trying to manage the stock market (pretty desperately) for quite a while already. This year is also special for their AIIB leadership. The chronology, causation of international agreements, yuan swings, stock markets, wretched measures is not clear. There are speculative talks on internet tubes that the Chinese stock markets are attacked for "reserve currency threats" (and even this).
by das monde on Thu Aug 27th, 2015 at 02:30:25 AM EST
[ Parent ]
The Chinese government decided to push down the exchange rate against the US$, when previously they had not been pressing down very hard ... in order to reverse the appreciation against the Euro, ASEAN, Latin American and African currencies. That was a reverse of their policy which was previously prioritizing getting placed into the IMF SDR basket.

That operation requires buying US$ denominated assets.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Aug 27th, 2015 at 10:29:28 AM EST
[ Parent ]
What's being claimed is that China is selling its holdings of US assets...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Aug 27th, 2015 at 11:06:44 AM EST
[ Parent ]
They bought originally when they dropped the target ... since the stock market crash, they have to prop up the RMB to hit their current target ... they are basically offsetting private RMB capital outflow, so in effect mostly selling US Treasury securities to Chinese citizens.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Aug 27th, 2015 at 08:20:28 PM EST
[ Parent ]
So many Chinese ARE dumping their savings INTO US Treasuries, and forcing their government to sell Treasuries from their foreign exchange reserves (which are not in any useful sense "savings").

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Aug 29th, 2015 at 12:01:26 PM EST
[ Parent ]
Thus savings glut rules, after all :-)

What about the investment glut, which is basically savings glut in exponential?

by das monde on Mon Aug 31st, 2015 at 07:37:33 AM EST
[ Parent ]
But its investment droughts in the US and the EU, which create the imbalance ... the savings accumulation in China is a necessary result of the Chinese government managing to keep growth going while those investment droughts were cemented in place by misguided US and EU policies.

The notion that investment and savings are two independent factors that come together in a market for loanable funds is the fairy tale that is used to distract from the investment drought and blame it on (1) a consequence, rather than a cause and (2) in a different country from the countries that the imbalance originates.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Sep 3rd, 2015 at 05:25:53 AM EST
[ Parent ]
The investment drought is a consequence of investor expectations of ~15% return on equity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 3rd, 2015 at 05:37:27 AM EST
[ Parent ]
Which underlines the madness of ideologically rejecting public investment with quite different expectations.

I used to be afew. I'm still not many.
by john_evans (john(dot)evans(dot)et(at)gmail(dot)com) on Thu Sep 3rd, 2015 at 05:50:23 AM EST
[ Parent ]
Keynes: The Marginal Propensity to Consume and the Multiplier
When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how "wasteful" loan expenditure[8] may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly "wasteful" forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict "business" principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Also: Concluding Notes on the Social Philosophy towards which the General Theory might Lead
I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

One could say that the "Japanization" or long-term "Zero Interest Rate Policy" is a sort of "suicide of the rentier". But it leads to "secular stagnation" because of the refusal to allow fiscal expansion, or rather the demand that restrictive fiscal policy compensate for expansionary monetary policy.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 3rd, 2015 at 06:15:15 AM EST
[ Parent ]
But I am still waiting to find out just what harm is done to the USA by China holding >US $1Trillion in the form, mostly, of US Treasury Notes paying less than 1% per annum. How does China holding these notes as a shock absorber or whatever, including hypothecating them, differ from the TARP money, which was supposed to have been 'sterilized'? How does, (per Wiki), "the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies..." play out under current circumstances or does it do so?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 31st, 2015 at 10:35:44 PM EST
[ Parent ]
There's no harm to it ... its not being held in order to accomplish something, its being held as a side-effect of maintaining the exchange rate at the pegged level. If there is any damage done, it was already done when the bonds were purchased.

If the Chinese were to sell them into a market without a strong Chinese demand for them, the result would be an appreciation of the Chinese currency relative to the U$, and if it was done in the kind of massive way raised by fear mongers, would result in a US export boom to China.

And that would not be a harm to the US as such, though it would be a harm to those interests within the US who believe they benefit from a sluggish labor market, and who raise funds in US$ in order to actually invest them  elsewhere.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Sep 3rd, 2015 at 09:33:41 PM EST
[ Parent ]
I suppose it would at least cause a hefty bout of inflation since you can't relocate halve the global supply chain over night.
by generic on Fri Sep 4th, 2015 at 03:10:54 AM EST
[ Parent ]
Yes, there would be a supply-shock round of inflation, but except for the private interest of those with massive amounts of inherited wealth denominated in US dollar terms, tight labor markets offset most of common negative impacts of a supply-shock round of inflation.

While the US economy is far more open than it once was, it is still under 1/5 of GDP imported, and substantially less than that imported from China and any nations likely to be dragged along with the Chinese action.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 4th, 2015 at 06:23:47 PM EST
[ Parent ]
The Fed's alleged inflation target is 3%, though they are chronically unable to even come close since 2008. And, arguably, the most serious threat to the world economy is deflation. If the USA experienced even 4% wage push inflation for two years that would not likely exceed the difference between the alleged 3% Fed goal and the actuality of the annual inflation rates since 2008. 4% inflation for five years would start to whittle down the debt/GDP ratio about which conservatives obsess. It could also pull the world back from the threat of a debt-deflation death spiral. Having the USA again be an engine of world economic growth would be a good thing!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 4th, 2015 at 08:38:32 PM EST
[ Parent ]
When interest rates are close to their functional floor, there is not a lot that the Fed on its own can do to inflate the economy. Paralyzed fiscal policy from a paralyzed Federal Government seems likely to ensure that the sluggish growth will continue until the US has a damp squib of a recession.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Sep 8th, 2015 at 02:04:08 AM EST
[ Parent ]
Agreed. It is what an administration could do that interests me. Treassury doesn't issue bonds in order to pay Social Security obligations. It issues checks directly to the accounts of recipients. (I know -there is an SS Trust Fund.) So the mechanism is there. The administration could find ways to increase benefits and use that to inject additional benefits. The big obstacle is the widely but erroneously held notion that federal expenditures must be funded.

In 2017 a Sanders administration could revisit the 'Trillion dollar coin' idea or employ many other mechanisms to increase economic activity. A National Infrastructure Bond Authority could issue 2% bonds that Treasury could purchase with money freshly created by the Fed. The proceeds from these bonds could be used to pay for the infrastructure. Taxes on uses of the infrastructure so created could be used to retire the bonds. This should work for infrastructure to electrify the rail network, to generate renewable energy, etc. Those proceeds could be put into a perpetual trust to finance needed expenditures that do not offer such an immediate payback - such as child care, assistance to the elderly, etc. Sort of like a very limited form of a nationally chartered bank.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 8th, 2015 at 01:55:20 PM EST
[ Parent ]


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