Don Quijones: Wrath of Draghi Hits Germans Who Refuse to Blow Their Savings

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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

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  1. Moneta

    Savings glut my eye. It is definitely a lack of investment. Low velocity as the money is getting parked.

    The vast majority of baby boomers do not have enough saved up for retirement. And pervasive austerity which typically leads to a cut in social nets only contributes to savers tightening their purse strings even more…. I don’t expect to get good returns for the next 5 years so I am saving 3X more than I should… 3X because I know 1X will be taken to pay for current retirees who never had the chance to save because of bad policies. Our leaders keep on denigrating us for our general lack of savings but then institute all kinds of policies that force us down the path of material consumerism.

    The problem is that our economic growth is mostly based on materialism and hard assets… always money for new buildings, never enough for maintenance or those working in them. In fact, the vast majority of companies’ most important assets and liabilities don’t show up on their balance sheet: cheap oil, roads, water, clean air, NASA research, SS, medicare, employees, education, etc. They are free loading and/or contributing to a growing distortion in the valuation of goods and services.

    With less than 5% of world population, US is still consuming more than 40% of world resources. If it wants to boost its economy, it’s going to have to fund industry that consumes little energy. As long as it supports energy intensive endeavours, it’s going to be squeezing ever larger segments of its population.

    1. jgordon

      With regards to your last paragraph, societies are still growing in complexity (ever increasing rules, regulations, departments, assistants, administrators, agencies, etc), and meanwhile the real energy surpluses required to fund that social complexity are on a continual downward trajectory.

      Since increasing social complexity (and industrial society itself) is mutually exclusive with low energy use, there’s a train wreck coming one way or another. We need to radically rethink what we’re doing if any of us are to get out of this alive, and I don’t mean by fooling ourselves with wishful thinking nostrums of green energy and fiscal stimulus. I think that once again, everyone here is missing the point. To use an analogy, it’s like worrying about putting a band aid on a stubbed toe when the whole leg is about to fall off from gangrene.

      1. Moneta

        I agree. And I also believe we will keep on funding energy intensive endeavours because that’s what the ones in power know.

        We will be forced into simplicity.

        1. Left in Wisconsin

          But not all at the same time. Indeed, many have been “forced into simplicity” already by long-term unemployment, homelessness, etc. And yet nothing changes (for the good). I see no reason to think those in power will ever be forced into simplicity. They will simply continue to take control and use for themselves increasingly disproportionate shares of world resources. And blame the rest of us for our inability to successfully “compete” with them.

        2. different clue

          Can those not yet forced into simplicity begin practicing some simplicity ahead of time? Can 10 million suburbanites turn themselves into 10 million suburbistanis? Techno-peasants who weatherise their houses well enough to need near-zero gas/oil/electric input to heat them and cool them . . . who set up multi-thousand-gallon roofwater harvesting systems . . . who install waterless composting toilets and figure out how to sanitize the humanure compost enough to be totally germ-free and safe to food-garden with . . . etc.

          Could enough such people emerge clumped up in certain areas to where they can transform their suburbs into suburbistans? Work out their own neighborhood-scale mutual co-survival support systems and suburbistan-scale mini-economies for some production and consumption of survival energy/water/food?

          Some of those suburbistans which escape violent extermination at the hands of a spiteful establishment determined to let no one survive its own system-collapse extinction could keep a rudimentary level of culture and civilization alive the way the Irish Monks kept some civilized knowledge alive through the Dark Ages.

      2. Nathanael

        You’re basically wrong about the energy trajectory. The widespread development of solar panels means we’re getting bigger and bigger real energy surpluses.

        Solar panels are a complicated technology by world history standards, but pretty simple by modern standards. They have a fairly short supply chain; factories can be set up anywhere (and have been), raw materials are common and cheap, and refining basically requires energy… which can be supplied by solar panels.

        They’re also inherently a *distributed* form of power generation, which increases robustness and reduces the complexity of the system.

        It’s no panacea, but it’s something to watch, because it’s already happening. Anyone remaining dependent on fossil fuels is toast, but entire communities are insulating themselves from that at high speed.

  2. Teejay

    Did you mean to write: 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.” ?

    1. Yves Smith Post author

      Yes, the sentence parses, even though it’s long. I had an even longer sentence originally. And I have the “is” that you put in brackets there. It parses “hypothesis….is based”.

  3. financial matters

    The message that government spending (deficits) puts money in people’s hands and their personal bank accounts and that government surpluses (balancing the budget) takes this away is definitely a hard one to get across.

    Looking forward to the new book edited by Mariana Mazzucato “Re-thinking Capitalism”. She has assembled an impressive group of authors:

    Michael Jacobs, Stephanie Kelton, Randall Wray, Yeva Nersisyan, Andrew Haldane, William Lazonick, Stephany Griffith-Jones, Giovanni Cozzi, Joseph Stiglitz, Colin Crouch, Dimitri Zenghelis and Carlota Perez

    and chapter headings include ‘The failure of austerity: rethinking fiscal policy’, ‘The costs of short-termism’, ‘Innovation, the state and patient capital’ and ‘Decarbonisation: innovation and the economics of climate change’

  4. Disturbed Voter

    Humanity can be parasitic or mutualistic on the ecology that was here before we developed into monsters. Civilization can be parasitic of mutualistic on political-economics. Function vs dysfunction … choose one.

    The idea of taxing savings rather than rewarding it, is clearly dysfunctional. This inversion is directly caused by debt money. Asset money doesn’t have this irrational outcome … though in that case it actually is better in a bank where it can be used for responsible loans (as tradition says), not speculation, not put under the mattress. So they are envisioning an asset money problem, in a debt money situation. New math and creative accounting, treats debits and credits the same … but they don’t repeal gravity.

    1. different clue

      The proof that Civilization “can” be mutualistic is found in the fact that some Civilizations WERE mutualistic . . . bio-terraforming the Amazon, for example.

  5. jabawocky

    Yes I suspect much of the real savings are not even in the german banking system but somewhere offshore.

  6. Angry Panda

    My “retch index” went to nine and a half out of ten right about the line “the compression of investment returns due to a massive global savings glut”…

    …ok, I can’t speak for the Europeans, though I suspect they are not very different. But in the U.S., what you saw is a huge inflation of the financial sector by the Fed over a number of years, which basically resulted in too much capital chasing a finite amount of assets. Cue asset inflation, cue depressed returns, cue guys reaching to the bottom of the barrel just to grind out an extra 100 bps “this year”, which is how you get all these oil companies that are blowing up today getting financed in the first place. Even though at the time (i.e. years ago) you could look and their numbers and see – hey, if oil even twitches from current levels, life will suck majorly.

    On top of that, once the return deflation spiral commenced, the pressure was on for everyone (insurance guys, pension guys, whoever) to pile on and throw even more capital into that same finite supply of risk assets (yielding less and less). That’s not a savings glut, that’s people trying to justify their annual bonuses. Plus, in the case of pensions, the apparently only mainstream strategy for matching chronic underfundedness and baby boomer retirements – throwing money to the hedgies and hoping for a high single digit annual return to offset your funding obligations.

    I suppose one thing that all these learned economists refuse to publicly recognize is that in a given economy you CAN have parallel financial slash monetary systems that do not necessarily interact with each other (or need to). See QE, the. [Never you mind that the Soviets, back when, had THREE parallel monetary systems going with no linkage between them – retail, wholesale, and trade…]

    1. OpenThePodBayDoorsHAL

      Pushing on the string of lower and lower rates has done nothing to spur corporate investment, as Yves points out (plus the short-termism) Hurdle rates in the CFO’s office are very sticky, when money cost 6% they decided the hurdle rate should be 12% or something…but now that money is free the hurdle rate should drop to 6% but it hasn’t.
      So maybe they should try the opposite: dramatic rate hikes. Since the hurdle rate is sticky it wouldn’t mean less corporate investing. And voila, Mom and Pop an Mr. Pension Fund Manager and Mr. Insurance Company General Account Manager would have some shekels again from earning interest. Before you know it, velocity would pick up again.

  7. Rhondda

    Draghi said, “U.S. households allocate about a third of their financial assets to equities…”

    I think Mr. Draghi must have forgotten some sort of modifier, like, “the top 10% of US households…” or “on average” because most Americans own no stock at all.

    CNN 2015: Less than half, or 48%, of American adults have money in stocks, according to Bankrate’s Money Pulse survey…

    The stock-owning Americans include anyone that has money invested in pension funds, 401(k) retirement plans, IRAs, mutual funds, ETFs or those owning individual stocks…The Bankrate survey identified a number of factors that keeps people from investing. The biggest problem by far is that people don’t have enough money to invest.

    1. salvo

      yep, but for Mr Draghi and his like, those not belonging to the top 10% just don’t exist

      1. RMO

        Perhaps “1/3 of the total value of all U.S. household financial assets are held in equities” would have been the real stat he was trying to quote?

        I bet if they’re stupid enough to actually make deposits subject to negative interest rates and they continue making currency harder to get that the goldbugs will be happy for a little while as I can see gold coins or bullion being a way to cope – all the while remaining blissfully unaware that the value of gold is every bit as much a shared illusion as any fiat currency.

        1. Tinky

          Setting aside the pertinent fact that gold has intrinsic value, while fiat currencies do not, you conveniently ignore an even more important fact: the “shared illusion” of the value of gold has been maintained for thousands of years, and its accepted value has remained high, in stark contrast to paper currencies.

          That you fail to mention this, and that you use the derisive expression “goldbugs”, reflects either ignorance of the facts, or some agenda.

          Gold has been a superior store of value for millennium. Fiat currencies have never lasted, let alone held their values, for longer than a small fraction of that time.

          Over the past five years, a period during which gold lost significant value versus the USD, this is how it performed against other notable currencies. Would you have preferred to have held your savings in those currencies, or been a “goldbug”?

          Russian Ruble – up 97%

          Brazilian Real – up 81%

          South African Rand – up 80%

          Indian Rupee – up 25%

          Mexican Peso – up 24%

          Australian Dollar – up 20%

          Canadian Dollar – up 10%

          Japanese Yen – up 9%

          EUR – up 7%

          1. Praedor

            Curious, what is t the “intrinsic” value of gold? Oh, you mean for googaws and bangles, intrinsically useless junk.

            The only value in gold is in its FEW uses: electric conductor, heavy metal label in protein structure solving (but mercury or selenium works just as well), in some minor nano applications (carbon has more use), minor use in dentistry though that will keep fading away as newer tech comes along.

            Goldbugs worship gold as if it had magic value, ignoring fact that to base currency u on it REQUIRES a government to assign an arbitrary value to it and to confiscate it. It is also impossible to deal with economic downturns or crashes effectively, requiring social Darwinism (Oh, you’re poor? Too bad, the government cannot do anything because not enough gold don’t ya know. Have to let this permanent depression work itself out…or we need to find a big gold vein to be able to have more money to feed and house you. Sorry, no way to do safety nets with gold. You’re better off dead).

            Would LOVE to hear how you do Basic Income Guarantee on a gold standard, and yes, basic income is going to be REQUIRED as automation increases and available work disappears. Can’t ALL be born rich or be over compensated CEOs…of companes with zero employees.

  8. cnchal

    . . . 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.”

    Taken to it’s extreme end, “those up to no good” are being defined as anybody that doesn’t spend every dollar, pound, euro, yen or penny that they have and also those that refuse to borrow and spend as much as possible as their credit score allows.

    Can’t these “policy circle” assholes be fired?

    The peasant get’s blamed for trying to save a couple of real bucks, while the plutocrats and corporate behemoths squirrel away $trillions in cash represented as electronic bits and bytes on a computer hard drive located anywhere but supposedly in a tax haven, money which will never touch a peasant ever again.

  9. TedWa

    “To our great amazement, it’s this purported glut — and not his monetary policies — that lies behind the historic decline in interest rates.”

    Indeed, the low rates were to help keep the banks afloat but Draghi has spun that truth into saying it was to help the people. What person in their right mind would buy that revisionist history…

  10. Paul Greenwood

    Get rid of the €500 note and watch the Ruble Gold Note or Yuan Gold Note become the new store of value. Where there is demand there will be supply

    1. Praedor

      If I trusted bitcoin I’d give these looter clowns what they want: full e-cash…oops, in a form they cannot track and in a form they can’t penalize by negative interest rates.

  11. ke

    Ignorance produces insecurity. The majority in the big cities is shorting out photosynthesis to prove an economic theory of scarcity, cutting off its own food chain with the petticoat (petrodollar) reserve currency, global trade killing the food chain on land and in sea, increasing CO2 and decreasing O2.

    Adding insult to injury, it them votes to implement scarcity policies across the countryside with public healthcare, education and safety. But all you have to do to short the short is generate your own power, which is a quantum distribution we call food. Take another look at the plant.

    The majority cannot sustain reproduction itself, tells you how to reproduce by law, and is about to default on the latest actuarial ponzi and go to war again, to maintain the status quo, RE feudalism from the ports out. Trump doesn’t “love” playing with debt and RE doesn’t finance itself by accident. Without majority participation, increasing interest below to default from above, debt as credit wouldn’t exist; the majority cannot reboot

    The majority requires savings from work and has built a legal system proving to itself that it doesn’t. There is no savings glut. There is a glut of paper, digital and PM stupid, Austria all over again.

    1. ke

      I’d love to see Trump or Hillary try to troubleshoot one of these moron electronic control systems, without killing themselves.

  12. Chauncey Gardiner

    That central banks’ massive QE-NIRP cash infusions are not finding their way into the real economy either directly or indirectly is coldly intentional and a function of policy and the established money distribution system.

    Draghi’s blaming German savers rather than looking upstream at those from whom he derives his political leverage would be mildly amusing if the policies and structures weren’t so damaging to the long-term interests of the people.

    As Michael Hudson observed during a recent interview posted here:

    …”The successful ‘error’ of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you’re seeing in Greece’s selloffs. So when you find an error that is repeated, it’s deliberate. It’s not insane. It’s part of the program, not a bug.”

  13. ke

    If they want consumers with wallets…a highly suspicious assumption. If you aren’t raising your own kids, why would you look 5 minutes ahead, let alone generations. The sophistry and their automatons don’t have an original thought to split. Working people vote with their work.

  14. RMO

    The continued refusal among our world’s elites to even really talk about fiscal measures reminds me of a terrible Italian zombie movie called “Hell Of The Living Dead” wherein a “crack” military team spends ages ineffectively shooting the zombies in the body until one of them (figuring out the rules of zombie films) shoots one in the head drooping it to the ground. Then, in EVERY SINGLE SUBSEQUENT ENCOUNTER they proceed to shoot them in the bodies again until the one guy shouts at them “In the head you idiots!”

  15. ke

    If you are wondering about the German response is to European Human Primate Behavior, you might take a look on YouTube at The Mommy Wars with Stephan.

  16. nothing but the truth

    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

    (financial) savings = debt

    too much savings = too much debt

    thats all there is to it.

    what does “too much debt” mean? Too high asset (collateral) prices.

    How did we get here? Central banks forced us.

    Central banks have infinite ammo, as the MMT tards keep telling. So they can make infinite mistakes too.

    MMT is not the solution. It is the problem.

    1. different clue

      MMT is not the solution? It is the problem?

      Them’s fightin’ words to somebody or other.

  17. RBHoughton

    I have a suspicion that European public debt is out of control because the ECB has seen the way the Fed is printing the government revenue year by year and it feels incumbent upon it to track the devaluation.

    I sometimes suspect G20 meetings are held partly to correlate devaluations so they don’t show up in exchange rates.

    As a central banker Draghi looks on money as entirely fictitious – just paper for exchange and of no intrinsic value. He can put all sorts of it on his books and simply overlook them. Like old soldiers they just fade away.

    It looks simple to discover a reason why households are saving less and taking on more debt. Its the intention of the bankers that they should do so and they are slowly and belatedly responding, abjuring their former careful ways, throwing caution to the winds and doing what their parents and grandparents said they should never do. “Neither a borrower nor a lender be.”

    Forcing European savers into the rigged market of limited liability company shares on the stock exchange is an irresponsible act of desperation.

    Its particularly astonishing to see it happening in Japan after a couple of generation of intense frugality. It looks socially like a chink in the armor of propriety, a step on the path to a Mad Max society.

  18. ke

    So much internet. So little education. If you are young and its all noise, you might YouTube The School of Life.

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