...against fictions and other tall tales

Saturday, 12 March 2011

Low national savings are not detrimental to the economy

In this article, economist Daniel Gros will have you believe that Americans should be concerned about the decline in the US national savings rate since the start of the recession. According to Gros, "what matters for a country is not only what households save, but the national savings rate, i.e., the sum of savings of households, the corporate sector and the government". Unfortunately, this is not necessarily always the case. As the subprime crisis and the ensuing recession have taught us, the financial balance of households is a key factor in ensuring a good functioning economy. As we've discussed before (here and here), within a sector, all balances net to zero. Assuming a constant foreign sector balance, the government must spend (by incurring a deficit) in order for the private sector to save, by definition. In other words, government (deficit) spending funds private saving (i.e. the sum of corporate and personal savings). This should be viewed as an "iron law" of national accounting. Therefore, next time you hear about the low US national savings rate, remember that, at the moment, it represents a boon to households and the US economy rather than a sign of fiscal deterioration.

Charts 1 and 2 show that high national savings do not necessarily translate into increased personal savings. For instance, the high US national savings of the mid-to-late 1990s did nothing to improve the personal saving rate at the time. In fact, if you look close enough, you'll notice that the 20-year peak in national savings that occured in 1998 corresponds with a large drop in the personal savings rate.

As for Gros's concern about the possible reaction of international capital markets to the low US national saving rate, my view is that there is little, if any, cause for worry. Chart 3 shows that the large increase in government expenditures (i.e. negative government saving) in recent years has had minimal impact on US interest rates (for instance, on 10-year Treasuries). As explained recently by PIMCO's Paul McCulley in an excellent commentary:
Today, the putative bond market vigilantes are not wrapped around the axle about fiscal deficits in fiat currency countries [...]. Indeed, their sovereign bonds are in great demand at low yields, just as should logically be expected when the developed world private sector is running ever larger financial surpluses. Fiscal deficits are not crowding out private sector borrowing because the private sector doesn’t want to borrow. Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset! (PIMCO, July 2010, p. 3) (my emphasis)
I could not have summed it up better.

Chart 1: National Savings (% of GDP), US, 1990-Present

Chart 2: Personal Saving Rate, US, 1990-Present

Chart 3: Net Government Saving and 10-year Treasury, US


  1. I've been reading some of your comments. Excellent insights, very comprehensive work. I'm just curious why so many Canadian topics. I enjoyed your comments on the Bank of Canada's position. Certainly professional. I passed your site on to some colleagues, one of whom in Canada. I'll enjoy reading the rest of your columns, and hopefully you'll surprise us with new features besides the Music Breaks.

  2. Thanks Jorge. Glad to have you as a regular! Also, I hope your colleagues will find something of interest on this site. Appreciate you circulating. Regarding the BoC's position: yeah, until very recently, listening to them was like being back in the 1970s: they see signs of inflation everywhere. Even at the peak of the subprime mess back in 2008, you still heard Bank officials talk about inflation and ways to improve its measurement. Here's an example: http://www.bank-banque-canada.ca/en/speeches/2008/sp08-11.html

  3. I understand your point...not much to inflate these days other than gold and that's a useless commodity. But some players find comfort and markets are about comfort.

    My point on Canada is why do so many of your columns relate to Canada. I think that constitutionally Canada is an interesting experiment, but economically very few global tradeoffs are sorted out in that theatre, aside from Potash, tar sands and arctic sovereignty.

    You impress like a solid keynesian, almost ultra-orthodox. Japan must now certainly be a Keynesian solution in the making.

    Any thoughts in that regard.

  4. Sorry Jorge, I forgot to mention in my last reply that I live in the land of Wolverine so I like to comment on our economy from time to time. As for Japan, I hope the amount that I see being discussed will be sufficient. At an equivalent of $180 billion, I think that's somewhere around 3-4 percent of GDP (probably spread out over several years). It'll definitely help. But then I read that they're considering raising taxes to pay for the additional spending. Some would say this could turn out to be counterproductive, as it might reduce purchasing power during a period when the Japanese need it most.

  5. Wolverine is a favorite of any true keynesian...no one has more animal spirit than W. Now I see where you get your grit. Well done.
    The amount has been increased to $245B and should rise. However, aren't we also in the midst of a national economic meltdown with global consequences. Japan is one of the world's biggest importers of foreign goods and exporter of goods and capital...the global implications seem to be difficult to put a hand on. Your caution is insightful.

  6. Great use of the expression "animal spirits"! Your comment regarding Japan's global weight is right on. Lots of commentators, especially in the business media, get blinded by Japan's supposed debt problem. Most of them aren't aware that Japan's debt is owed (and owned!) domestically. As a result, the chances of Japan facing the same fate as Ireland (who owes the equivalent of over 1000% of GDP to foreign lenders) is pretty slim.

  7. Just to clarify my last comment: Ireland's debt problem is related to the fact that its PRIVATE sector external debt is equivalent to over 1000 percent of GDP. Japan doesn't have that problem given its economy is largely export-led.

  8. Thanks for clearing up the suspicions that I has about low national savings.