Re: [A-List] A global savings glut?

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

In the dollar economy, there is no savings, period. What there is is an
expansion of dollar denominated debt intermediated by foreign central
banks magically relabelled as savings. It is the most blatant example of
creative accounting. The report went to to point out that debt to equity
ratio remain unchanged. Of course, because it is a law of arithmatic
that circulation may change the label, but not the quantity. Credit
expansion increases asset value which maintains the debt equity ratio
even when debt is increased byt the credit expansion.

Below are a few teeling quotes from the report:

Credit spreads for corporate and sovereign borrowers fell to historical
lows and equity prices rose strongly.
This configuration kept borrowing costs down and lifted asset values
across the board. Households took particular advantage of favourable
financing conditions, leading to rapid credit growth in many regions.

Against this background, the reduction of macroeconomic imbalances
remains a third key challenge. One issue is the mounting US current
account deficit and growing surpluses elsewhere, especially in Asia. A
related development is the continued rise in household debt and low
household saving in many advanced industrial countries. Finally, fiscal
deficits have remained high.

Corporate balance sheets improved in the three major currency areas in 2004.
Debt declined relative to equity and value added across the board,
although US corporations still appear stronger than those in the euro
area and Japan

Rising house and equity prices increased the wealth of private
households in many countries in 2004. In the advanced industrial
economies, for which data on household assets and liabilities are
available, household wealth grew both in absolute terms and relative to
disposable income (with the notable exception of Japan). The prices of
residential property, which accounts for the lion’s share of household
assets in most economies, rose sharply across a broad range of
countries. In many cases, house prices at the end of 2004 were
at, or close to, historical peaks (Table II.6). Rising household wealth
was associated with a commensurate build-up of debt. As a consequence,
the debt/asset ratio of households remained broadly unchanged in the
euro area and increased in the United States
(Graph II.9). Correspondingly, debt as a share of disposable income
continued to rise, especially in the United States. The bulk of the
increase in household debt was attributable to borrowing against housing
collateral in the form of mortgage loans.

All of the above got worse in 2005 and are about to come to a head
anyweek now.

Henry C.K. Liu

Jurriaan Bendien wrote:

> Henry Liu argued for a dollar glut, and I suggested both a dollar glut
> (Liu) and a savings glut (Bernanke). The Bank for International
> Settlements reports an interesting table which may shed some light on
> this: http://www.bis.org/publ/arpdf/ar2005e2.pdf (global saving and
> investment trends, as a percentage of GDP, page 24)).
>
> Taking the 2004 figures from this table:
>
> World: saving 24.9% and investment 24.6 % discrepancy -0.2% points
> USA: saving 13.7% and investment 19.7 % discrepancy +6% points
> Euro area: saving 20.9% and investment 20.2% discrepancy -0.7% points
> Japan: saving 27.6% and investment 23.9% discrepancy - 3.7% points
> China: saving 48% and investment 43.9% discrepancy -4.1% points
> Latin America: saving 21% and investment 19.8 % discrepancy -1.2% points
> Central and Eastern Europe: saving 19.1% and investment 19.8%
> discrepancy +0.7% points
>
> As you can see, in most cases except the USA, Eastern Europe (and some
> Asian tigers not considered yet here) investment levels are below the
> savings level, this is really Bernanke's "savings glut" which tends to
> be attributed to the lack of a "climate of business and consumer
> confidence". Of course, if they get very aggressive towards Iran, this
> climate will get even worse.
>
> The "cumulative change in percentage points", taken from the same
> table, for 1991-2004 (I assume this means the annual average across
> that interval of time?):
>
> World: saving +1.7% and investment +0.1 %
> USA: saving -2.5% and investment 1.1 %
> Euro area: saving -1.1% and investment -2.9%
> Japan: saving -6.8% and investment -9.0%
>
> The USA is really the odd man out here, having imported a lot of
> foreign investment capital.
>
> Now, I do not know exactly what they include in saving and investment,
> but I assume they use the standard national accounting categories -
> investment, they say, includes both "residential and business capital
> formation" which refers really to total gross fixed capital formation,
> i.e. net new additions to fixed assets, unadjusted for depreciation.
> Obviously "gfcf" does not equal total investment, because it excludes
> investment in financial assets (and intermediate goods and services,
> land purchases and most traded second-hand assets). But financial
> assets is precisely where a lot of the apparently "non-invested"
> savings have gone - bonds, securities, derivatives, hedges and the like.
>
> If we were to exclude investment in residential real estate from total
> investment, the discrepancy between saving and fixed investment
> becomes much more dramatic (I do not have this data on hand just now).
> Basically, fixed investment in production has stagnated, or even
> declined, in real terms. GDP also includes the imputed rental value of
> owner-occupied housing, and again, if we take that out, the trend is
> more sharply visible. As I have previously argued, because more people
> now own homes with a mortgage, which appreciate in value, rather than
> rent housing (in OECD countries), this boosts GDP totals and therefore
> also official economic growth totals.
>
> If we disaggregated savings and their disposition according to income
> groups, we'd probably find that the poor don't save because they do
> not earn sufficient money, and the rich do not use their additional
> savings for new investment in productive physical assets (excess
> capacity in relation to final consumer demand) but invest more in
> financial assets instead. The middle classes also do not invest much
> of their savings because of uncertainty about the future. Out of this,
> we get ideologies such as that there is a lack of entrepreneurship, a
> lack of risk taking and so on.
>
> So anyway, in reply to Henry, my hunch is that there's both a dollar
> glut (unusable currency reserves of governments - BIS claims an
> additional $535 billion in Asian reserves during 2004, raising total
> Asian reserves to $2.4 trillion) and a savings glut - a savings glut
> in the sense of a lot of capital seeking acceptable, low-risk yields
> outside the sphere of production. Or, in Marx's phrase, "the ultimate
> barrier for capital is capital itself". The result is a sluggish,
> rather conservative world economy, lacking much dynamism overall,
> except in a few sectors such as minerals, financial speculation,
> computers etc. It's not that there is a capital shortage, rather
> capital is globally superabundant - but globally, under conditions of
> extreme income disparities and volatility, the additional capital
> created is not invested very much in expanding productive capacity.
> The capital "shortage" exists perhaps only from the point of view of
> those who seek long-term capital to invest in expanding production,
> including governments concerned about job-creation.
>
> In other respects, it seems to be a "live now, pay later" kind of
> world based on relatively easy credit - to the extent that not just
> the historical trend in fixed investment, but also in savings is down.
> To balance out the picture though, really we need data on the trends
> in final consumer demand...
>
> Jurriaan