How saving endangers the economy — and what to do about it

An impressive video featuring former Treasury Secretary Larry Summers has been making the rounds.

Summers makes the case that the United States and other Western nations may have reached a state of permanent stagnation in growth and employment. In Japan, per capita incomes grew strongly until the 1990s, and since then they have been growing very weakly and intermittently. Summers cites Japan as an early example of what might occur elsewhere.

Japan’s stagnation is shocking — today, the Japanese economy is only half the size economists in the 1990s predicted it would be if it had continued on its pre-1990s growth trend. As Summers notes, in the U.S., growth is also well below its pre-crisis trend, and unemployment remains persistently high. More than 12 million people who want work and are actively looking cannot find it. That’s a very ugly situation.

Under normal conditions, central banks can lower interest rates on lending to banks as a way to encourage activity and fight unemployment. Lower rates make business projects easier to afford, and more business projects should mean more jobs. If an economic shock pushes the unemployment rate up, central banks can lower lending rates to ease conditions. And conversely, if economic conditions are overheating and inflation is pushing up above the Federal Reserve’s target of 2 percent, interest rates can be hiked to encourage saving and discourage spending.

Yet in the current slump, unemployment has remained elevated even while interest rates have been at close to zero for four years while inflation has remained contained. This suggests that the interest rate level required to bring employment down significantly is actually below zero. Summers agrees:

Suppose that the short-term real interest rate that was consistent with full employment had fallen to negative 2 percent or negative 3 percent sometime in the middle of the last decade.

But central banks can’t lower interest rates below zero percent because people can just hold cash instead. Why invest if you’re going to lose money doing so?


15 thoughts on “How saving endangers the economy — and what to do about it

  1. Savings endangers the economy just like eating well, exercising regularly, and keeping your head together endangers your health.

    In an economy that is this corrupt, where markets for everything have been manipulated to the point of destruction, why would anybody expect anything to function well?

    Return to markets that reward/punish prudent/reckless behaviors, and the economy will return to balance.

    John…nice gig @ TheWeek.

    • A lack of demand leading to unemployment and stagnation has nothing to do with eating well or exercising regularly. Perhaps if you didn’t think in terms of irrelevant and incorrect metaphors your views on economics wouldn’t be so naive and mistaken.

  2. In a fiat monetary system with a fractional reserve requirement close to zero, savings have no real meaning.

    Lack of demand is not the result of excess of savings. Lack of demand is the result of a loss of confidence into failing government policies.

  3. So 23 years of 0 interest rates and your answer is that interest rates should now be negative! The drag on the economies is large quantities of “zombie” credit; the interest rate at 0 prevents their liquidation so it’s an overhang on balance sheets that doesn’t work through. Categorically we can observe the answer is not 0 interest rates (and neither is it negative ones either!) – 23 years and counting. Saving is a waste of time because you are competing with a central bank – central banks should stop QE and let interest rates find their nature point – far higher because cash is in natural short supply (unlike credit!) – that will force liquidation and reset the economy to one it which it can grow again. Negative interest rates and QE4EVER simply condemn us to 20 years of the same again. Of course politicos will opt for this easier route so I guess we will be debating the lack of growth and yet more negative rates on your blog for some time to come.

    • If the central bank were to raise the overnight rate substantially and this led to a mass liquidation of debts as you suggest, and thus large scale bankruptcies, the yield curve would quickly invert as the economy went back into recession, leading the central bank to lower the overnight rate again.

      • How would these resulting CB actions lead to a better outcome than we currently have? I wouldn’t be surprised by the yield curve inversion – as per my first post “cash is in natural short supply” and the curve inversion simply tells us again that cash is more valuable than credit. This will remain so until cash/credit ratio is improved. Current strategy to inflate ourselves more “cash” is backfiring for all but the asset rich as developing countries simply compete against the desired cash earnings inflation. Bacon artwork $+++, salaries $—. If cash earnings won’t grow then credit re-price is the only alternative. I think it would be a quicker/more reliable outcome – a 50% collapse would clear out duffer companies and allow for Schumpeter’s “Creative destruction of Capitalism” to fill the resulting gap. And before you say “oh how heartless” think on this. This “doomsday” would last for 3 years – the alternative is 25 years of 0 growth and crushing lack of opportunity for new job seekers. 25 years. That’s several generations of young people that will suffer – and such generational/class suffering could well lead to revolutions.

  4. Lack of demand is the result of debtors taking on too much debt (courtesy of the cheapest credit in history) AND savers being robbed in order to facilitate it.

    As a result, savers pull back even more and debtors … well, they are overwhelmed or defaulting.

    It’s just as impermanence says above: “Return the markets that reward/punish prudent/reckless behaviors, and the economy will return to balance.”

    The problem is that they don’t want to do that because their benefit would be lost and they’d be bankrupt.

  5. Let’s face it, savers saved because they wanted to be responsible and have something in their old age, but also because they’ve seen all this before. They’ve seen crashes, some even lost, and they got wiser for it.

    But when you change the rules and start rewarding spendthrifts, people who took risks when they shouldn’t have in order to gain asset appreciation, banks who lent to people with bad credit when they knew better, what do you expect that’s going to do to the person who was responsible?

    “In a truly free, non-manipulated market the weak would be culled, new dynamic competitors would fill the void, and consumers would benefit. Extending debt payment schedules of zombie entities and pretending you will get paid has been the mantra of the insolvent zombie Wall Street banks since 2009. The Federal Reserve is responsible for zombifying the entire country. And it wasn’t a mistake. It was a choice made by those in power in order to maintain the status quo. The fateful day in March 2009 when the pencil pushing lightweight accountants at the FASB rescinded mark to market accounting rules gave birth to zombie nation. And not coincidently, marked the bottom for the stock market. Wall Street banks were free to fabricate their earnings, pretend they didn’t have hundreds of billions in bad loans on their books, and extend the terms of commercial real estate loans that were in default. With their taxpayer funded TARP ransom, ability to borrow at 0% from Uncle Ben, and the $3 trillion of QE cocaine snorted up their noses in the last four years, the mal-investment, fraud, and idiocy of the Wall Street drug addicts has reached a crescendo. […]

    Who can afford to run something that consistently loses money, other than our government? Wall Street bankers can when the taxpayer is footing the bill and Bernanke/Yellen subsidizes their mal-investment by lending to them at 0%, providing them $2.5 billion per day of QE play money, and paying them $5 billion per year in interest to park the excess reserves that aren’t getting lent to small businesses and consumers at their thousands of gleaming bank branches.”

  6. “Everything in Economics is a Balance Sheet” – Karl Denninger

    “We’ll take this $100,000 and borrow it for 30 years @ 7%. This produces a payment of $661.44 per month for 360 months (30 years of 12 months each.) The total paid is $238,119.87 over that time, so just over $138,000 is paid in interest, or just over $4,100 a year on average (this is misleading, however, as at the start of the loan most of the payment is interest and that falls off over time.) We will further assume that this 7% rate reflects a reasonable return for the risk that you will not pay and that inflation will occur — that is, the rate is negotiated between the lender and borrower using all known facts and no lies or distortions.

    Now let’s assume we “lower rates” (by any mechanism) but the risk does not materially change. We lower them to 4% by employing “QE”.

    The payment is now $475.83, or a total of $171,298.51 over 30 years. Note that approximately $65,000 in interest was saved by the borrower.

    This is a benefit to the economy, right?


    It is in fact at best neutral to the economy because someone holds the loan and every dollar the borrower saves the lender loses!

    That is, over the 30 years $66,821.36 is not received by the lender. The borrower saves that $66,821.36 and can thus spend it on something else but every one of those dollars is not collected by the lender and thus he cannot spend them.

    Net benefit? Uh uh.

    Every dollar benefiting one person comes out of someone else’s back side.”

  7. He goes on further to state:

    “See, I get the “benefit” of the lower house payment immediately. But most people and places who hold the bonds don’t buy just one bond. They try to maintain a constant maturity, and so when QE begins the few bonds they buy, as the oldest ones roll off, have a much lower yield but as a percentage of the total they are small.

    As time goes on, however, those suppressed-rate instruments become a larger and larger percentage of the portfolio and therefore their impact on income goes up.

    How do you think the Japanese went from having one of the largest private repositories of saving to nearly literal zero over the last 20 years? Why do you think their little monetary game didn’t work?

    It didn’t work because by the arithmetic it can’t: Every dollar one party saves in lower borrowing cost someone else eats in lower interest income.

    The bottom line is that QE produces what looks like a “benefit” without cost at the start of the program, but that appearance is a con job. The benefit — your being able to purchase something on credit “more easily” — is immediate, but the cost shoved off on someone else is identical to the benefit, but recognized over time.

    As time goes on in the program, that cost is recognized in the form of lower income by the certificate holders who are incapable of spending money they never receive.

    In short at best QE is nothing more than pulling forward the ability to spend paid interest from tomorrow into today but for each dollar pulled forward to today it is taken from tomorrow’s spending!”

  8. Here’s another good article that explains what’s happening. This is all about saving the banks. It’s really not there to help unemployment (which it hasn’t) or homeowners, but to bail out the insolvent banks.

    “The Media Again Repeats Bernanke’s Lie” – Karl Denninger

    “If I get a lower rate to buy a house the person who buys my mortgage paper gets a lower return on their invested capital. Every dollar I “save” they lose.

    Any time that someone tells you that cutting the cost of financing “spurs economic growth” they are lying because it cannot do any such thing. For each dollar that the spender “saves” an exactly identical dollar is lost by a lender and is unavailable to be spent in the economy.

    If The Fed tries to “neutralize” this by performing “QE” then the value of all existing dollars is diminished by the exact number of dollars of QE and again this offsets on an immediate basis the so-called “benefit.”

    Lowering interest rates results in what looks like a benefit when it is initiated, because lending (bond) portfolios have duration and the initial input of the lower-yield bonds are a small percentage of the whole in the portfolio. But that cash statement impression is deeply misleading; an honest balance sheet must account for the discounted value that is lost immediately even though it is to be recognized over time, as the recognition of that loss is inevitable.

    This morning the latest scheme claim is that the ECB is contemplating a negative deposit rate. Let ’em do it; that will cause an instantaneous drain of all excess reserves. But that will not boost the economy, because again forcing that credit into the economy still causes the lender to receive a lower rate of return and immediately cancels the so-called “stimulus” that is allegedly “gained” by the person who borrows at the cheaper rate!

    QE and suppressed interest rates are in fact deflationary because they destroy capital formation and it is capital that is critical to capitalism and the expansion of both wealth and value. All manipulation can do is shift wealth from one person to another — and the person it is being shifted to, unless you’re one of the privileged bankster or political class, is not you.

    Any entity that puts forward tripe like this is lying and actively trying to deceive you. Any person who has taken first-semester accounting knows that any accurate accounting must account for the debit that goes with each credit and vice-versa.

    All of these claims of “benefit” are intentionally omitting the other side of the balance sheet and for this reason are an intentional fraud.”

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