In response to an FT article by Martin Wolf on 17th November 2015, entitled 'Corporate surpluses are contributing to the savings glut'
‘The notion of a ’savings glut' helps explain the ultra-low real interest rates we have seen since the global crisis of 2007-09’
If ever a phrase qualified as misdirection this one does.
The word ‘savings’ is easy to understand – money set aside from current income, to be used for future consumption and/or for the generation of future production - the latter also known as ‘investment'.
The word ‘glut’ isn’t a mystery either – an excess of something.
Clearly we do NOT have an excess of income set aside from current production; we are not creaking under the weight of record setting productivity, nor are we suffering from the thrift of a miserly population. Whatever the glut is, it’s not in ‘savings’. So what is it?...
…it is a massive surplus of credit, waived into existence by central bankers, used to purchase government debt and mortgage paper, and increasingly ETFs. This newly generated currency is then either:
a) Deposited back at the Fed where it earns interest, or
b) Leveraged to the sky at zero percent, where the ensuing credit, duly multiplied, is then channeled into the economy though a number of channels:
1. Carried to emerging markets to be ‘invested’ at much higher rates (and until recently at very favourable exchange rates)
2. Ploughed into developed stock markets where it has fuelled record share buy backs and other financial engineering
3. Used to front run the central banks by purchasing further government debt in the sure knowledge that the central bankers are ready and waiting to buy it at increasingly inflated prices
4. Used to create another bubble in property, this time predominantly at the high end…so far
These are not ‘savings’. They are leveraged casino chips – products of financial engineering and balance sheet chicanery. This ‘money’ has never been within a country mile of a productive enterprise. It was created to slosh around in financial markets and that’s exactly what it does. It does not find its way into capital investment. On the contrary, it withers the real economy, because it distorts the signals the economy needs in order to function healthily - I.E. Prices.
If you are a banker making money hand over fist in this egregiously rigged game, it’s a great deal. If you’re a management team incentivised with EPS bonuses and lucrative options it’s a dream come true. If you’re a government spending above its means, kicking problems down the road for our children to deal with, it’s fabulous. If you’re a central banker it’s an opportunity to try to bend the world to fit your theories, or even to write a book about how you saved the world. For the young, the old, the unemployed, for entrepreneurs who need ‘honest’ interest rates to make intelligent decisions, for savers, for pension schemes etc etc – it is an unmitigated disaster waiting to happen, and it’s global:
- In 1995 the balance sheets of global central banks totalled just over $2 trillion. In 2015, that total has risen to just over $20 trillion - a tenfold increase in two decades.
- In the US, businesses have raised $2 trillion of net debt since the 2008 financial crisis, and yet real net business investment is still 17% below the level it had reached in 2000. Where is this credit to be found? It is in inflated stock and bond prices – it has done nothing to effect fundamentals. When the bubbles burst, this inflated ‘wealth’ will evaporate, but the debt will remain.
Zero and negative interest rates do not reflect a glut of savings and neither are they a policy response to a glut of savings. They are a desperate strategy to keep the financial bubbles from bursting, to provide funding for financial market gamblers and carry traders, and to disguise governments’ inability to service their debts through revenue. The latter would be called ‘insolvency' for any organisation lacking it’s own printing press. What shall we call it when central bankers use theirs to keep the casinos happy, and to support their governments to keep kicking the can down the road? Incompetence? Hubris? Fear? Or fraud?
There is no ‘savings glut’ in the real world – it ‘exists' only in the realms of Ponzi finance and tooth fairy economics. It is a spurious concept that is symptomatic of the thinking that got us here in the first place.
A fellow reader replied:
You are stating that "...nor are we suffering from the thrift of a miserly population. Whatever the glut is, it’s not in ‘savings’..."
but " ... a massive surplus of credit..".
They are one and the same! There is a lot of confusion about it.
Our money system is a credit system. Money is mainly (93%) created by private banks who create money by lending. When private banks lend, they credit their own balance sheet (with the loan) and at the same time debit their balance sheet (with the new deposit of the borrower because it is a new liability of the bank).
The bank is the debtor of the new deposit and the loan borrower is the creditor of the new deposit.
Every other debt has also two sides, whether it be corporate or government loans or bonds: For every debt, there is always a creditor and a debtor.
The creditor in this equation is someone who does not need his entire money income for current consumption, so he puts the remainder ("savings") into the mentioned financial asset.
So every financial saving mirrors a financial debt (credit) instrument.
If you say that there is a massive surplus of credit (debt) then you also say that there is a massive surplus of savings, because it is the same.
The savings glut is just another expression of a "massive surplus of savings" or "massive surplus of debt/credit".
Why is there so much savings and thus so much debt/credit? Because there are too many savers who can afford to save. Who are them? To a big extent multinational corporations and the very rich (the inequality problem).
You are absolutely correct.
And when the cart learns to pull the horse, we'll all get the sustenance we need from eating paper claims on the food that hasn't been grown yet. We should call this system 'creditism'. It will work particularly well if governments and their banker cronies own all the carts.
In the meantime perhaps we should let the laws of supply and demand dictate prices, including the price of 'money', and stop trying to play God...you know…capitalism.
Another reader replied:
So assuming you are accurate in your charges, what policy changes would you enact to rectify the situation...
I think there is no stopping what’s coming. The economy is not a machine that can be dialled up and down with a thermostat, however much the CBs would like us to think it can, however much that would suit the re-election prospects of sitting politicians. It’s a complex natural system that, I believe, has passed a tipping point and thus what is coming is more akin to a phase transition in a nuclear reactor - a melt down. Perhaps a better metaphor would be to say that there is no clearing the snow when an avalanche has started.
In the nineties we had a few ‘little' warnings…E.G. The Mexico crisis and the subsequent rescue of the banks, notably Goldman Sachs, by the Clinton administration. Each time any hint of liquidation beckoned Mr Greenspan stepped in with his famous ‘put’ - institutionalising ‘moral hazard’ in the process. The collapse of the tech bubble of 2000 was the first ‘BIG’ warning - again the central bankers ignored it and reflated. The collapse of the housing bubble was the second big warning - again the central bankers ignored it and reflated. Each time the bubbles get larger, the busts get bigger, the bailouts get fatter, the interest rates get lower, the CB balance sheets get bigger, and governments get deeper and deeper into debt. Japan would be a 'basket case' vision of our future if the CBs managed to keep this going. But they won't - the excesses are now global. What's coming is a sovereign debt crisis that will eventually wash up even on the shores of the mighty US, though in its early stages capital will flee to the dollar, as it is doing already.
My best guess is this:
There will be a deflationary collapse, followed by massive programmes of QE and fiscal expenditure, and negative interest rates if they can push through the abolition of cash. This attempt at reflation may finally push money into the real economy, giving the central planners the inflation they have been praying for - but this will not prove to be the type of inflation they are looking for. Paul Volcker may even get a phone call at that point.
Eventually there will be global reset of the monetary system, including debt forgiveness - there will be a new playing field, a new Bretton Woods if you will. This will probably be overseen by the IMF, who will be the only governmental institution with a balance sheet that doesn't look like the world's worst hedge fund. The dollar will not be the global reserve currency any longer; neither will the Yuan or any other national currency. I have no doubt that the IMF is already sitting on plans to recapitalize the world with the SDR.
It doesn’t end well and no amount of tinkering will fix it.