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Savings

There is an interesting discussion at the Cafe Hayek blog about how much it matters that Americans don’t currently save very much. Well, given that real interest rates (taking into account inflation) are negative, and that holding cash means real wealth declines, it is not surprising that real savings have been steadily eroded. The blog’s author is certainly right about this point, however:

“If saving is good for Americans, the nationality or place of residence of the savers whose saved resources are invested in the American economy is irrelevant. If saving is good for Americans, then given Americans’ saving rate, savings invested in the American economy by non-Americans are a blessing – a blessing that is bigger the greater is the amount of this foreign savings and investment in the American economy.”

“Yes, we Americans would be even wealthier materially if we Americans saved even more – wealthier materially both as a product of many or all of us having larger financial portfolios, and as a product of the economy of which we are a part having an even greater volume of total output. But for this very reason we Americans are made wealthier also when foreigners save more and invest their savings here, regardless of how much or how little Americans save and invest.”

Of course if I can nit-pick, I would make the point that when, say, Chinese investors bought oodles of US government bonds in the years leading up to the credit crunch of 2008, it helped drive US long-term interest rates even lower, hence encouraging even more US domestic consumer spending and borrowing, a process we know went horribly wrong. (The main culprit in all this was the Federal Reserve, not China, I should point out). Of course, if non-domestic savers are channeling those savings into investments that yield a positive future return, such as investments in technological innovations, new products and services, then that’s all to the good.

If we were to move away from fiat money to a commodity-based monetary system and 100 per cent reserve banking for demand deposits, then a savings culture would be encouraged considerably. At present, persuading people to save is understandably hard because people, even if they are not hard-money zealots like me, smell that there is something rotten with our money.

In some ways, I see parallels between the loss of faith in paper money and the declining credibility of the AGW crowd. I think it was Brian Micklethwait of this blog who said something along the lines that we have had junk science, and now junk money. There is only so much junk that human civilization can stand.

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17 comments to Savings

  • Rob H

    I think it would be better to say that the US Federal Reserve used the strong demand for bonds from China as an excuse for keeping interest rates low.

  • llamas

    Johnathan Pearce wrote:

    “If we were to move away from fiat money to a commodity-based monetary system and 100 per cent reserve banking for demand deposits, then a savings culture would be encouraged considerably. ”

    And why do you say that? What is it about 100% reserve banking that encourages savings?

    My personal theory is that a “savings culture” is most-directly fostered by accessible cultural memories of hard times. In many western nations, and especially the US, very few people have ever known really hard times, or know anyone that has, and so the impetus to save against ‘a rainy day’ is weak – because there are never any rainy days.

    In other places in the world, where large numbers of people have known very hard times, and those hard times are solidly located in the cultural memory, the impetus to save is much stronger. Hard times are not limited only to hunger and cold, but also to government policies that (for example) heavily penalise spending or place capital and assets at great risk.

    The stability or arrangement of the banking system has very little to do with it, IMHO. For an example, Germany, France, Belgium and the Netherlands have very stable banking systems and excellent social welfare provisions, so nobody has to be cold or hungry – but their household savings rates are 5-7x that of the US. By contrast, Australia and New Zealand, again with good banking systems and social welfare systems, actually have negative household savings rates.

    What’s the difference? Well, the Germans and French and so forth have a strong cultural recollection of very bad times – everyone still has grandparents who had to subsist on boiled bootlaces and mouse fricassee for a while there, and this tends to encourage the savings habit. By contrast, the blessed nations of the Antipodes have never known serious privation or war at home, and so the urge to save for bad times is suppressed, because nobody has ever seen bad times or knows anyone that has.

    llater,

    llamas

  • Johnathan Pearce

    And why do you say that? What is it about 100% reserve banking that encourages savings?

    People are going to be more likely to keep money on deposit if they feel confident of getting that money out if they want it, rather than not.

    Of course, with time deposits, rather than demand deposits, if people are willing to forgo access to their money for say, a year, it can be lent out for such a period, etc.

    Well, the Germans and French and so forth have a strong cultural recollection of very bad times – everyone still has grandparents who had to subsist on boiled bootlaces and mouse fricassee for a while there, and this tends to encourage the savings habit.

    It is certainly true that in the case of Germany, horror of inflation is a lingering effect of the Weimar years. Which is a constant reminder of how fiat money can and has been abused. If you give a printing press and a monopoly issue of money thus printed to a government, that power will be abused eventually.

    Of course, if memory serves, you have scoffed at the idea of hard-money currencies in the past. Scoff away.

  • RRS

    Here, in the “Western World” (Developed Economies?) we seem to have reached a stage in what is now “managerially operated production” (where ownership is separated from determinations of capital deployments) such that savings (non-consumption of production) has little, if any, effect on the increase in surpluses (capital formations).

    The “profits” (surpluses from production) retained in businesses have been increasingly applied to aggregations rather than deployed in activities that generate expansions in the economies through decreases in prices of consumption, lower costs of distribution (though there was some of that about 10 years or so ago), etc.

    In “plain-a-words” capital has become increasingly “locked-up” in businesses and not significantly re-deployed in innovations, etc., in a way that would substantially increase overall standards of living in a regular pattern.

    Those factors may very well underlie populist support for actions through governments to supplant the lock-up of capital. Not that they have been, or will ever be, effective.

    But, the motivations of managers, in acquiring control of capital (via profits) to increase enterprise sizes, market shares, etc. have not generated expansion of “Western” society – in the fashion of say the canal and rail building deployments of 170 years ago, when the motivations of managers were far less a part of capital deployment determinations.

    Tough call, but the proportion of “savings” to consumption or to production matter less (see, Japan) than how the capital accumulated, wherever and in whatever form, is re-deployed.

  • RRS

    For skeptics of the role of the managerial class, and its functions in our developed world, consider:

    How are savings dealt with?

    We turn our money over to managers, investment funds, shares in corporations, union and government (managed) schemes, who put them at the disposal of managers.

    Put them in a bank account. The bank invests with managers.

    Unlike the Cafe Hayek scenarios, the owners of what is saved do not determine how that is deployed.

    This all probably has a bit of Gordon Tullock flavor, without his intellectual balance.

  • Laird

    I’m with Llamas on this one. 100% reserve banking wouldn’t affect our confidence about getting our money out of banks: we already have supreme confidence in that, thanks to deposit insurance and (when that fails) government bailouts. (380 banks have failed here since 2007, and not one depositor has lost a penny, the statutory $250,000 insurance “limit” notwithstanding.) Fear over getting our money back is not the problem.

    Anyway, “saving” doesn’t just mean bank deposits; it also includes investments in securities, etc. We’re not doing much of that right now, either.

    We Americans don’t save at the same rate as other societies because we don’t have a saving culture: we have an “instant gratification” and “conspicuous consumption” culture. And we won’t start saving (as our grandparents did) until we’ve suffered the same sorts of privations that they did during the Great Depression. Don’t worry; it’s coming.

    But he and I part ways over the merits of a commodity-based monetary system. That’s coming, too, when the dollar collapses.

  • RRS

    I would take issue with the idea that “we” (U S Public) don’t “save” enough.

    After all, who ultimately owns all those retained earnings that are built up and building up in publicly-held enterprises?

    As noted above, the issue becomes what is done with “savings” – a tin can in the backyard?

  • RRS

    There is also at least a slight mis-implication of foreign “investment” in the U S.

    A large, if not the major segment of that “investment” simply reflects the settlement of the trade deficit balance.

    To the extent that “investment” is into sovereign debt, it is not into productive capital, but rather a “deferred payment” arrangement.

    Some of it represents acquisitions of U S assets, businesses, land, resources, etc. not productive increments necessarily.

  • phwest

    I’m suspicious of these claims that Americans don’t save. After all, 15% of my total compensation is saved for my retirement by the government on my behalf….

  • Alsadius

    It’s not hard to get people to save because of the currency system. It’s hard to get people to save because spending is a lot more fun.

  • PeterT

    I’m suspicious of these claims that Americans don’t save. After all, 15% of my total compensation is saved for my retirement by the government on my behalf….

    I’m assuming this is a joke.

  • PeterT

    The value of everything including relates to its scarcity. The scarcity of fiat currencies are under the control of the government. If these thrifty Germans found that their government had made their currency rather less scarce then the real value of their savings would be equivalently less. And so it was proven. Fiat currencies are a bad thing….but they don’t have to be. It is possible to have a fiat currency that has a stable value, but not if the printing presses are running continuously.

    Peter

  • Laird

    PeterT, it’s not a joke, it’s a reference to the total Social Security “contribution”, half of which is deducted from wages and the other half paid by employers. Many people do consider it a form of “forced savings”; after all, why save for retirement when the government is going to take care of you? (People are soon going to begin to find out just how foolish that assumption really is.)

    Incidentally, the total contribution amount in 2011 is only 10.4%; it was reduced as a “stimulus” measure.

  • llamas

    Peter T – +1

    True for all forms of currency – it’s not the format, it’s the debasement by the government that starts the rot.

    Alsadis also – +1.

    llater,

    llamas

  • I’m not sure I agree with Alsadius – it would depend on how one defines ‘spending’. Is buying stocks or other investments included? In a non-inflationary environment, keeping one’s money under the mattress would qualify as ‘savings’ at least as well as any other form, but we have not had such environment for many decades now.

  • RRS

    Distinguish between “savings” and “Investment.”

    See, The Theory of Money Ludwig v. Mises

  • That was part of my point, RRS.