A Visual Representation of the Zero Bound

I’ve been trying to understand the relationship between savings and interest rates in the economy. There are many theoretical models and constructs that purport to represent the relationship between savings and interest rates, but it is interesting to look at it from an empirical standpoint. This graph shows savings at depository institutions as a percentage of GDP against the Federal Funds Rate:


The actual cause of the desire to save rather than consume or invest is uncertain. Perhaps this is a demographic trend — with more people closing in on the retirement age, they seek to save more of their income for retirement. Perhaps it is a psychological trend — fear of investment in stock markets and bond markets, due to fear of corruption, or market crashes or a general distrust of corporations. Perhaps it is a shortage of “safe” assets — by engaging in quantitative easing, central banks are removing assets from markets and replacing them with base money, and deleveraging corporations are paying down rather than issuing new debt. Perhaps it is anticipation of deflation — people expecting that saved money will increase its purchasing power in future. Perhaps it is a combination of all these things and more. But whatever it is, we know that there is an extraordinary savings glut.

There have been a lot of assertions that interest rates at present are unnaturally or artificially low. Well, what can we expect in the context of such a glut of savings? Higher interest rates? Based on what?

There was a clear negative association between savings and interest rates up until interest rates fell to zero, while the savings rate continued to soar. Theoretically, lower interest rates ceteris paribus should inhibit the desire to save, by lowering the reward for doing so. But interest rates cannot fall below zero at least not within our current monetary system — there exist some theoretical proposals to break the zero bound using negative nominal interest rates, but these remain untested and controversial. Even tripling the monetary base — an act that Bernanke at least believes simulates an interest rate cut at the zero bound — has not discouraged the saving of greater and greater levels of the national income.

In the long run, the desire to save increasingly massive percentages of the national income will cool down. Sooner or later some externality will jolt the idle resources in the economy into action. But that is the long run. In the short run saving keeps soaring. Investors are not finding better investment opportunities for their savings and the structure of production does not appear to be adjusting very fast to open up new opportunities for all of that idle cash.

57 thoughts on “A Visual Representation of the Zero Bound

  1. John, you might want to double check that you’re not capturing the effects of banking sweeps.

    Beginning in the early 90s, banks started to use technology that allowed them to “sweep” all chequing account deposits into savings accounts in order to reduce reserve requirements.

    I think the data series you are using might be comprised only of savings deposits. If so, much of the growth in that series might be due to the sweeps effect.

    • Interesting point — data series I am using is savings accounts plus money market funds — but would that have gotten more severe since 2007? After all we have excess reserves now. And especially given the fall we saw in the years up ’til 2007?

      • Excluding the high rates of the 70’s Volker period, rates have been sub 5% and even in 1776 Adam Smith suggested rates around 5% was normal. This would imply stable prices/inflation of 0% i.e. hard money kept inflation at bay.

    • Agreed and possible. When I worked in the Treasury of a Bank in early 2000 we were doing this when reporting balances to the central bank.

      • I checked this out.

        Checking plus savings as a percentage of GDP shows exact similar uptrend, though stronger growth since 2008:

  2. Historical Theories are useless, unless they are revised by survey data, world wide to identify current intrinsic human nature and geograhic/cultural patterns.

    Then the data needs to be split into people who consider themselves “financially literate” and those that don’t. Economics is a social “art”, I won’t even call it a science. The only way you can get a feel for why savings has increased is to start asking the question. I know I only paid attention to cash savings when I felt the rate was high enough, and market to uncertain to invest. I was hoping for deflation. But what about other people? I am an insignificant drop in the savings ocean. My decision needs to be taken into the context of statistically significant populations. Small Academic “Samples” don’t cut it for me. Researchers don’t spend a lot of time collecting their data sets, they don’t use call centres to collect ( I worked in polling in my youth). If they do they cite others research.

  3. John: Possibly skewed by my own views, here are the “feelings” of the upper-middle-class (excluding those with comfortable wealth and including middle-class families with some discretionary income) here in the USA — and assuming your that your “savings” excludes cash on hand at banks and other businesses:

    FEARS of running out of money, of job loss, of collapsing asset values (especially home), of inflation in college tuition and necessities, of breakdown in civil order (including banks) requiring stockpiles and/or evacuation, etc. RESULT: Less discretionary spending* and more savings, including precious metals.

    A current obvious example — more of cause (fear) than of effect (less spending) — is the “run” on guns and ammunition. People who care about family and future do not trust the Obama administration, especially since the refusal to explain the enormous government buys of ammo, muzzling of Benghazi witnesses, refusal to acknowledge Muslim jihad in Boston and Ft. Hood massacres, etc. This gut survival fear is, of course, on top of spreading awareness of the deliberate destruction of the private economy and the deliberate cultivation of class and race “warfare”.

    * Spending by the wealthy and the poor is affected little if at all.

    • FEARS of running out of money, of job loss, of collapsing asset values (especially home), of inflation in college tuition and necessities, of breakdown in civil order (including banks) requiring stockpiles and/or evacuation, etc. RESULT: Less discretionary spending* and more savings, including precious metals.

      I think you’re exactly right with those factors, Don.

      • Update on lack of trust in Obama as reflected in (lack of) support for “gun control” legislation — May 10, 2013 Investor’s Business Daily: “… 88% of Americans wanted background checks on gun buys, yet less than half — 41% — trust Obama to ‘make the right decisions about gun laws’ “. (This fear} “showed up in internal polling by lawmakers (including many Democratic senators) who voted against the bill.”

        This IBD editorial, headed “Obama’s Biggest Deficit — Trust”, goes on to cite a Fairleigh Dickinson U. poll showing that more than a third of Americans think Obama is “hiding information* about his background and early life”, and a Washington Post biographer who found dozens of fabrications in his memoir.

        IBD concludes “What is Obama’s real agenda? No one seems to know.” That’s a bit coy, given their having published miles of column-inches revealing Obama’s lifelong, including presidential, anti-American** actions. I suspect that IBD’s editors, having provided abundant proof that Obama is an enemy**, are falling back on Sun Tzu’s, Clausewitz’s, et al’s rule of warfare: Don’t speculate on the enemy’s INTENTIONS; prepare according to his CAPABILITIES.

        For me, the recently revealed lies, malfeasance and coverup of Benghazi is “the last straw”. Obama, his gang, and his sycophants have lied about his background, the economy (stimulus, jobs, etc.), federal debt and deficit, employment, poverty, guns, Ft. Hood, Boston, climate change, Muslim Brotherhood, Osama’s execution, fossil fuels, “crony capitalism”, etc. etc., not to mention betraying and insulting our foreign allies and encouraging our enemies.

        * Obama’s character-molding mentors were anti-American Muslim Louis(?) Farrakhan, U.S. Communists Frank Davis and Saul Alinski (“Everything we do, we do for power!”), and Black Liberation (anti-white) Church Jeremiah Wright (“Not God bless America, but God damn America!”).

        ** I use the generalizations “anti-American” and “enemy” to summarize socialist-Communist-fascist top-down, anti-free market, racialist, anti-Constitutional, anti-rule of law, anti-JudeoChristian, pro-Muslim Jihad and Sharia, “Chicago Way”, etc. rule.

        • I don’t trust any politician, but Mr. O seems extremely conservative (in the original meaning of the word) to me. I think he is dutiful agent of the ruling class and is not going to rock the boat with any Alinskiish fun and games when everything is proceeding along so splendidly. Socialist? I daresay not a single worker has received even a scintilla of ownership and control of the means of production at his instigation.

          Farrakhan is a nationalist right-winger, ideologically speaking. He happens to be Black, but this doesn’t make him a leftist.

    • People are obviously saving because they’re afraid that their jobs, pensions, Social Security, and so on are at risk — an entirely rational fear, in my opinion, although most stores of value are now also at risk. I doubt their distrust is limited to the Obama administration; the debacle of the Bush years was also very impressive, and the more perceptive will have noted ominous proceedings going back several decades.

      • I doubt their distrust is limited to the Obama administration; the debacle of the Bush years was also very impressive, and the more perceptive will have noted ominous proceedings going back several decades.


      • Debacle(s) and ominous proceedings have indeed been perpetrated/caused by government over decades. However, the damage to society and risk to personal liberty have, like government debt, accelerated enormously under the Obama administration.

        Again, I suggest that their “gun control” campaign, so unpopular with constituents that senate Democrats revolted, reveals the intensity of public distrust and fear. While unprovable, I believe that, if President Roosevelt, Truman, Eisenhower or Reagan had asked for authority to strengthen background checks, the Congress and public would have readily complied.

        • I believe the function, if not the purpose, of the gun control – gun rights debate is to keep the lower orders divided against one another and thus easier to manipulate. However, that may be attributing too much intentionality to a governing class which seems to have lost both the will and the ability to keep things in order even to their own advantage, and is settling for kleptocracy.

        • “their “gun control” campaign, so unpopular with constituents that senate Democrats revolted”

          Follow the money. Who loses from gun control, economically speaking?

          This may have been the reason. Who is funding them?

          Or the Politicians were astute enough to know that gun ownership is a religion for many voters, so regardless of policy, they will always be remembered for one particular vote.

          Who knows how Congress thinks. They are power hungry psychopaths with NO moral scruples.

      • To Anarc @ May 11,2103 at11:09 (above): Apparently we need a glossary of terms. I try to avoid vague labels like conservative, ruling class, nationalist, right-winger, leftist. Perhaps academically impure, I consider “socialism” to include government CONTROL of the means of production, as in Nazi Germany. Obama calls it “redistribution”.

        Alinski was the chief theoretician and spokesman/author of the Communist Party USA, which was funded and controlled from Moscow. Power — of The Revolution — was the objective of all his “games”.

        I don’t know a lot about Farrakhan. But he clearly was anti-democratic, anti-American, Muslim, anti-JudeoChristian.

        I would welcome your enlightenment on Obama as “conservative” and Farrakhan as “nationalist right-winger”. Whatever anyone means by left/right, I know that Jefferson is on one side and Marx/Lenin/Hitler/Mao/Obama are on the other*!

        * Aziz and others focusing on economics, use the term “centrist”. Jefferson preferred “any form of tyranny over the mind of man”.

        • Obama and the Democratic Party establishment are conservative in the sense that they are trying to keep things pretty much the same as they were. In terms of general domestic politics, the Democrats want to keep the New Deal, which is now 80 years old. In foreign policy, they have been struggling to maintain the world order (U.S. imperium) set up at the close of World War 2, nearly 70 years ago. Being practical politicians, they emit a lot of double-talk, because that’s how you get elected, but their overall policies are conservative in the basic sense of the word. Furthermore, Mr. O seems to be particularly cautious, often with poor results, like the ACA. You can imagine how Lyndon Johnson would have dealt with Lieberman.

          The New Deal, America’s version of social democracy or the Welfare state, goes back to Germany’s Bismarck. Although Bismarck was a conservative, seeking to preserve the powers and privileges of Germany’s existing ruling classes, he observed that socialists were gaining political strength, due to various conditions which had resulted from the advance of industrialism and capitalism. In order to inhibit their progress, he offered a deal in which the working class would get paid off with various benefits in exchange for submitting to the existing power structure and philosophy, which included aggressive nationalist imperialism. This should sound very familiar.

          The socialists of the era had proposed that the problems occasioned by the development of industrialism and capitalism could be solved if the workers owned and controlled the means of production. Only some of them supposed that that arrangement could be brought about through government control. Others predicted that the government bureaucracy would simply become the new owning and controlling class, which is what happened where it was implemented.

          When it comes to ‘Left’ and ‘Right’, I would put Jefferson and the other classical liberals in the center. They believed in nearly anarchic freedom for well-off White men like themselves, but much less in the desirability of freedom for their women, children, servants, employees, slaves, the poor, those of inferior race or ancestry, and so on. (Since then, liberalism has branched out in many directions.) From what I have read Mao and Stalin did not really possess any political philosophy other than personal domination, although they found Marxist jargon useful to befuddle the minds of their victims and opponents.

        • Don, I think a Leopard can change its spots? Don’t you?

          I mean my political ideology changed in light of new information. Do you think Obama has changed his views?

          But then again I was never so rabid a believer to actually join any political or ideological party. So perhaps a “Leopard” has not changed his spots.

          Black Panthers actually have spots. And they are technically Leopards.

    • Well, personal saving rates are still low, only somewhat higher than 2008. This is probably some total size of savings, so the difference from low personal savings to this is due to companies and banks stashing cash and not people.

    • @ Don Guier: “FEARS of running out of money, of job loss, of collapsing asset values (especially home), of inflation in college tuition and necessities, of breakdown in civil order (including banks) requiring stockpiles and/or evacuation, etc. RESULT: Less discretionary spending* and more savings, including precious metals.”

      I don’t blame them. It is only 13 years since I traveled extensively around the USA and I was blown away by the consumer choice of USA made products, the number of new cars on the road, the cheapness of housing and the availability of work (Work wanted signs everywhere, unheard of in Australia at the time. So in 13 years you have entered two wars, had a 2 market collapses, a housing collapse, huge Government deficit. Massive importation from China (China was not part of WTO) when I travelled, but I did see Walmart springing up and I noticed how it was a one stop shop, ruining many small town businesses. US cars everywhere (Australia has a lot of Japanese cars) The people in Detroit had a lot of bling too.

      Would be nice to be the Walmart owners. Transfer wealth from Mom and Pop to key owners, whilst outsourcing production and chasing the declining incomes of EBT card recipients.

      It is quite a shock to the system

      • Buddy: As you probably know, but many do not, Wal-Mart is NOT the problem. It is the world’s largest private employer, and has created great wealth for investors. But it is non-union, and therefor vilified by Democrats, socialists, etc.

        Every employee works, and every customer buys, voluntarily.

  4. In a monetary system where money is loaned into existence, savings is not only irrelevant, but, as we have witnessed over the past half century, discouraged [as consuming because the raison d’existance].

    If we were playing with real money, in a real economy, savings would be critical to each individual’s [as well as collective] economic prosperity.

  5. I’d venture to guess that QE is what’s causing dramatic spike upwards since 2008 — by divesting the non-bank public of treasuries/MBS, the Fed is indirectly causing a spike in other types of assets held by the non-bank public (perhaps savings accounts). Every dollar of excess reserves created via QE has a corresponding liability on the banking sector’s aggregate balance sheet — we’re likely looking at it in this chart.

    • Excess reserves held by banks at the Fed are not savings or checking deposits or money market funds held by customers at depository institutions.

      • I did not suggest that they are. However, by increasing bank reserves (an asset held by the aggregate commercial banking sector), the Fed has simultaneously increased savings accounts (a liability held by the aggregate commercial banking sector). Simple accounting identity, as balance sheets must remain in balance.

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  7. (sorry, I don’t have a Twitter account)
    You wrote:
    “Friedrich Hayek’s worst idea — an equilibrium of expectations. Human plans never systematically take each other into account.”

    Depends how you mean “systematically”–but are you saying that entrepreneurs don’t take their customers’ (and potential customers’) future consumption plans into account?

    • They try to, but not in any way that could be described as an equilibrium.

      I think Hayek’s idea about markets as informational transmission mechanisms is correct, of course. I just think he took it in the wrong direction. I think Shackle (Hayek’s onetime student) improved Hayek’s idea:

      ‘Rational expectations’ remains for me a sort of monster living in a cave. I have never ventured into the cave to see what he is like, but I am always uneasily aware that he may come out and eat me. If you will allow me to stir the cauldron of mixed metaphors with a real flourish, I shall suggest that ‘rational expectations’ is neo-classical theory clutching at the last straw.

      Observable circumstances offer us suggestions as to what may be the sequel of this act or that one. How can we know what invisible circumstances may take effect in time-to come, of which no hint can now be gained? I take it that ‘rational expectations’ assumes that we can work out what will happen as a consequence of this or that course of action. I should rather say that at most we can hope to set bounds to what can happen, at best and at worst, within a stated length of time from ‘the present’, and can invent an endless diversity of possibilities lying between them.

      • Modern GMU Austrians (such as Horwitz) also reject pure rational expectations. They also do not believe that expectations can ever be in equilibrium; instead they are perpetually in disequilibrium (for the plans of many separate individuals can of course never mesh perfectly).

        The point for the business cycle (and here is where Hayek is going) is that it’s highly undesirable to add to entrepreneurs’ “epistemological burden” already difficult task of trying to “predict the future” (which is what all business activity essentially is; even “business as usual” is an implied prediction that one’s customers’ consumption patterns will not change).

        • Here’s an example I saw recently: a couple of years ago, the Chinese govt enacted some consumer subsidy on small cars, ostensibly to help the environment, but really to help its domestic automakers (Chery, Geely, etc). Naturally, the automakers ramped up production to take advantage. But suddenly, the subsidy was ended, and these automakers ended up with a glut of poor quality cars that couldn’t sell in the absence of the subsidy.

          In addition to having to predict the tastes of Chinese car consumers (a tough task on a good day), these automakers also had the burden of having to predict how long the subsidy would continue, and whether to gamble on increased production to take advantage of it. W/o such a subsidy, they could have focused on what should be their main task: trying to make cars consumers want.

          Similar arguments are made by modern Austrians re: the distortionary effects of central bank policy (whether inflationary or deflationary). How much of various price changes is comprised of “genuine information” on changing tastes and expectations vs. how much is caused by changes in monetary policy? Having to disentangle these effects increases the likelihood of entrepreneurial errors.

        • “what entrepreneur in his right mind would second guess the government policy?”

          Yes, precisely–the domestic Chinese automakers were in a sense “forced” to step up production to take advantage of the subsidy. Not doing so would mean losing market share (and nascent brand awareness) to rivals in a very tough market.

          But stepping up production is not an either/or choice. There is also the question of “how much” and “for how long.” These production, product life cycle, and supply chain plans need to be made years in advance. Doing it right, i.e. in a way to match up with consumer expectations, is hard enough in normal times. Add a new variable–subsidies–and it becomes even trickier. In this case, the companies miscalculated and ended up with a glut of excess inventory–a costly mistake.

        • Anyway, my point is: John wrote that expectations can never be in equilibrium with each other. My response: sure; but firms inevitably must make some effort to take into account the plans of other actors, such as consumers and rival firms. When they make very poor guesses, the result is waste; consumers don’t get the products they want, and firms lose money and/or shareholder value by not meeting their objectives.

          So Hayek’s point here is certainly not a bad one in my opinion. Govt must do its best to make sure that price signals are reliable and truly reflective of pertinent information (preferences, input costs, and yes–even “expectations”). “Perfect” foresight and dovetailing of expectations is an impossible ideal, of course; but that’s even more reason to strive to make govt policy as neutral as possible w.r.t. price signals and the (imperfect) feedback they provide over time.

        • Your case in point, in Australia we had a carbon tax introduced, so business geared up for the new legislation. Now we have the opposition saying they will repeal.

          A massive waste of resources.

        • Buddy,

          Yes. Regulatory uncertainty/inconsistency is another thing that “jams” the price signalling mechanism.

  8. John S writes:
    “…firms inevitably must make some effort to take into account the plans of other actors, such as consumers and rival firms.”

    I think not. What producers need to concern themselves with is creating the best product/service for the market and not worry much about others.

    Market feedback should allow them to tailor their efforts. Worrying about what everybody else is doing is almost always counterproductive.

    • Reply to Buddy Rojek, CPA of May 2 @ 09:13 p.m.: As you know, Buddy, but many do not — a carbon tax based on climate change from anthropomorphic CO2 emissions is totally fraudulent.

      • but ah ha now you see the scam for what it is. I always said a carbon tax is a tax that can be applied on necessities of life, heating transport. Now that capital gains and incomes have dried up, who will pay for the bloated socialist governments?

      • The Australian Governments revenue projections have a 3 billion dollar hole due to lower carbon price. Higher price equals higher tax, so there is an incentive to raise the price of the tax.

        • Taxes, taxes, taxes, taxes. Stealing, stealing, stealing, stealing.

          What a scam!!

    • Impermanence,

      You wrote: “What producers need to concern themselves with is creating the best product/service for the market and not worry much about others.”

      The problem is: what do we mean by “best”? What’s the “best” car? There are many desirable attributes: sharp handling, speed, fuel efficiency, a quiet engine, flashy styling. Some are contradictory; some buyers want a small car, others a large one. Price matters, too; usually, value for money is preferred, but some buyers want a high price to show off.

      Certainly, any car company would have to consider its customers’ desires (fashions, preferences, and priorities change). It also has to keep tabs on its competitors, to copy any promising trends and take preemptive action against disruptive new products. (And in fact all firms keep a close watch on rival firms).

      “Market feedback should allow them to tailor their efforts.” Yes, this part I agree with. Which is another reason why prices should need to be as “neutral” as possible: to provide continuous feedback to the firm whether they’re doing the right things. (We could call this feedback aspect the ex post function of prices).

      • Case in point. Ford made the cheapest transport with the Model T, but Chevrolet outsold them, because they made cars other than black. Cars are a consumer badge. What women, checks out the true engineering technicals of a car? What man does either?

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  15. Pingback: Angry Bear » Savings/GDP up cuz govt revenue down… it’s a leakages thing

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