Yves here. It’s key to stress that the “savings glut” hypothesis, promoted by Bernanke to help him escape culpability for the financial crisis, is based on the zombie economics idea, partly debunked by Keynes and dispatched by Kaldor and Robinson, of the “loanable funds model.” It posits that loans come from a pre-existing stockpile of savings. In fact, as we’ve discussed repeatedly, loans precede deposits. A decisive, but peculiarly ignored-in-practice debunking of the “saving glut hypothesis” comes in an important 2011 Bank of International Settlements paper by Claudio Borio and Peti Disyatat, Global imbalances and the financial crisis: Link or no link?. Or you can read Andrew Dittmer’s layperson summary.
Now one can argue that there is a “savings” problem, but it is more accurate to call it an underinvestment problem, and it’s a corporate underinvestment problem. I first wrote about it in 2005 and again in a New York Times op ed with Rob Parenteau in 2010. Corporations would have you believe they lack attractive opportunities, and economists have recently rallied to tout that notion, but it’s bunk. We’ve linked before to this lengthy and important post, No Great Technological Stagnation, and I encourage you to circulate it widely, particularly to economists.
What has really happened is that companies, particularly large ones that are normally better positioned to make significant investments by virtue of their size and robustness, have become pathologically short termist. That makes investment of any sort appear unattractive because from an accounting perspective, an investment inevitably includes expenditures that have to be classified as expenses from an accounting perspective, which means they hit quarterly earnings. Even worse, that short term fixation makes cost cutting look even more attractive than it ought to be, since the boost to profits is close to immediate and entails no current risk. Of course, the consequences of preferring cost-cutting to business development and investment is that companies have been eroding their franchises by crapifying marketing and customer service and support, starving development of new product lines (execs figure they can acquire them), losing skills, and making themselves more vulnerable to shocks by over-optmizing for efficiency (cheetahs and Formula One cars are both fragile).
So as Don Quijones points out, the central bank fixation on consumer savings is barmy. Even worse is encouraging consumers to borrow and spend. The normal state of affairs is for the household sector to be a net saver, since individuals seek to have reserves for emergencies and retirement. Moreover, numerous studies have shown that high levels of consumer debt are correlated with lower levels of growth.
If governments want citizens to open their wallets, they need to focus on higher wages and more jobs, which in today’s environment of lackluster growth means more fiscal spending. Beating savers until morale improves hasn’t worked. More intense application of the lash won’t produce better results.
By Don Quijones of Spain & Mexico, and an editor at Wolf Street. Originally published at Wolf Street
Since promising to save the euro at any price, ECB president Mario Draghi has thrown just about everything he can at Europe’s crisis-ridden economy. That includes the mother of all financial anomalies, negative interest rates. Yet despite all the trillions of euros of his alphabet-soup creations — QE, LTRO, TRTRO I, TRTRO II… — the European economy is still frail, growth is lackluster, public debt is out of control, and unemployment remains worryingly buoyant.
As for the region’s banks, the less said, the better.
Not to worry. As Draghi said in a speech to Asian government officials and business leaders on Monday, there’s still a great deal more that can be done to punish Europe’s hordes of savers, the central banker’s scapegoat du jour for all that ails Europe’s debt-laden economy.
The low or negative interest rates plaguing Europe are a symptom of a much bigger problem, he said: the compression of investment returns due to a massive global savings glut. To our great amazement, it’s this purported glut — and not his monetary policies — that lies behind the historic decline in interest rates.
Inevitably, whenever Draghi talks about “savings,” he has a particular kind of savings in mind: German savings. If Germans spent money on imported products rather than saving their money, they wouldn’t have an account surplus — which has been “above 5% of GDP for almost a decade,” he complained — and would thus save the world.
While Draghi bemoans Europe’s savings glut, reality is that household savings have been on a sharp downward trajectory ever since the creation of the single currency. Even in Germany, the personal savings ratio has slipped from 12% at the beginning of the crisis to 10% today. A similar trend has occurred in Japan, the U.S and just about every other so-called developed economy since the beginning of this century.
By contrast, household debt has been on a steep, upward path for decades. In the EU average household debt ranges from 54% of net disposable income in Hungary to 305% in Denmark. As a matter of fact, the four OECD economies with the most indebted households are all European — Denmark, the Netherlands (274%), non-EU member Norway (224%), and Ireland (207%). In Germany, average household debt is a rather modest 94%, just slightly higher than Italy’s 90%, but lower than France’s 105%, Belgium’s 112%, Spain’s 127%, and the UK’s 156%.
Naturally, Draghi would much prefer Germany’s debt levels to be higher and its savings rate to be considerably lower. He wants Germans to spend money they don’t have.
And he would like Germany’s savers to take a leaf out of middle-class Americana’s book and diversify their investments — i.e. plow a much larger share of their hard-earned savings into the stock market. “U.S. households allocate about a third of their financial assets to equities, whereas the equivalent figure for French and Italian households is about one-fifth, and for German households only one-tenth,” he said.
It’s just shocking how Germans refuse to trust stocks. The DAX is down 21% since April 2015, and Germans stick to their savings? Just shocking.
One way of pushing Germans into stocks would be to make it prohibitively expensive to save. All that’s needed is for German banks to begin passing the burden of negative interest rates on to their retail customers. But that’s unlikely to happen anytime soon because people would simply hoard their savings as physical currency.
This might help explain the ECB’s impromptu decision to stop printing the €500 note as of 2018. Supposedly the bill of choice of money launderers, drug traffickers, terrorists, and corrupt politicians alike, the €500 is so allusive that in Spain it allegedly came to be known as the “Bin Laden.” According to Bloomberg, a growing consensus is forming in European policy circles that large-denomination notes, including smaller ones, are “used only by those up to no good.”
But it’s not just criminals. High-denomination bills are also popular among law-abiding cash-lovers all over, especially with the ECB tripling down on financial repression. And in Germany cash-lovers abound. An estimated 79% of all transactions in Germany are conducted in cash. As Deutsche Welle reports, the ECB’s decision to eliminate the largest of the euro currency’s seven bills is widely seen as “an affront against cash payments and an underhanded ploy to loosen monetary policy even further.”
Even the Bundesbank recently stepped into the fray, warning against killing off higher denomination banknotes due to the debilitating effect it would have on public trust in cash [read: “Freedom Always Dies Bit by Bit”: Bundesbank Takes Sides in War on Cash].
The ECB went ahead anyway and pulled the €500 note, ostensibly as a crime-fighting measure. But few people in Germany are likely to believe the central bank’s official justifications, especially given Draghi’s latest verbal attack on German savers.
Indeed, rather than rewiring German saving habits, all his words and actions appear to have achieved is to add fuel to a public backlash against EBC policy. Already only one in three Germans say they have trust in the ECB. Unless Draghi begins choosing his words more carefully, by the time Germany’s general elections come around next autumn, that number is likely to be a lot lower. By Don Quijones, Raging Bull-Shit
Negative interest rates and helicopter money have already triggered the Clash of the Titans. Read… “We Cannot Afford another Draghi”: Germany Attacks ECB