savings rates, growth, and struggling green shoots
Posted by WARREN MOSLER on July 6th, 2009
So in the US the high savings rate is hurting growth, and in South Africa the low savings rate is hurting growth.
Next thing they’ll be saying is economies should not have a savings rate in order to have optimal output and employment…
Did I say they don’t understand the monetary system???!!!
And one reason the green shoots may be dying is the relentless monetary tightening as lower rates for savers,
quantitative easing as Central Banks accumulate higher yielding securities in exchange for reserve balances,
and lower interest paid by governments on their securities due to the lower rates
all contribute to removing interest income from world consumers.
South Africa’s Low Savings Threaten Growth, Nene Says
by Nasreen Seria
July 6(Bloomberg) — South Africa’s low savings rate is
crimping the country’s rate of sustainable economic growth,
Deputy Finance Minister Nhlanhla Nene said.
The low rate is also inflating the current account deficit,
making South Africa more reliant on foreign capital inflows,
Nene said in a speech to the South African Savings Institute in
Johannesburg today.
The rate of growth in consumer savings has been declining
since the first three months of 2006 after the central bank cut
interest rates to a 24-year low in 2005, spurring spending.
South Africa’s total savings rate is 17 percent of gross
domestic product, according to the quarterly bulletin of the
South African Reserve Bank.
“Persistently high current account deficits can lead to
macroeconomic instability if foreign liabilities rise too much
and foreign capital inflows dry up,†Nene said. “By reducing a
country’s dependence on foreign capital inflows, higher domestic
saving therefore makes an economy less vulnerable to sudden
reversals in capital flows.â€
The current account deficit, the broadest measure of trade
in goods and services, widened to 7 percent of GDP in the first
quarter as mining and manufacturing exports collapsed.
South Africa also needs to boost its savings in order to
lift the economic growth rate, Nene said. Africa’s biggest
economy is in its first recession in 17 years, and will probably
contract 1.5 percent in 2009, according to the World Bank.
“It is crucial to raise the level of our national saving
in support of both short-term economic stability and long-term
productivity growth and prosperity,†Nene said.
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July 6th, 2009 at 10:14 am
IS MONETARY POLICY FAILING?
By
Thomas E. Nugent
Just when we thought the Fed’s helicopter was grounded, it received a new fleet (were those the ones destined for the President?) to dump trillions of dollars on unsuspecting financial markets. The helicopter fleet consisted of securities purchases and lending facilities that were not part of the banking system’s normal cache of federal government debt that ballooned the monetary base (Exhibit #1). The securities were more in the form of “toxic assets†that represented failed mortgage pools and so called asset swaps that were in default. For the first time ever, the Fed extended its lender of last resort responsibility to the private sector, both domestically and abroad. As a result, Fed policy appears to have saved us from financial market Armageddon though it did nothing directly for aggregate demand. Actually the Fed helped restore markets but not output nor employment.
Exhibit #1
In addition to acting as a lender of last resort, the Federal Reserve’s heretofore primary role was to strive for economic stabilization through manipulating interest rates. The traditional belief is that lower interest rates will encourage companies to borrow and then spend on various aspects of the business process. In turn this spending is expected to increase jobs and incomes and ultimately trigger an economic expansion.
One measurement of the success or failure of this policy is in the growth of business loan demand. So far this policy seems to have failed as, even with record low interest rates for a number of months, the growth in loan demand as measured by commercial and industrial loans (Exhibit #2) is falling! Coincidentally, the decline in loan demand seems to be occurring at the same time that the Fed went to a zero Fed funds rate.
Exhibit #2
One problem in using interest rates to stimulate loan demand is that Fed policy to lower interest rates also affects savers. Trillions of dollars in money market investments have seen returns fall from a level of about 5% some 30 months ago to a level of virtually zero today as reflected in the interest rates on three month treasury bills (Exhibit #3).
Exhibit #3
The resulting decline in income for these investors must be offset by increased loan demand to have a positive overall economic effect. If it does not, as is the case today, Fed monetary policy becomes pro-cyclical –shrinking the economy by shrinking investor income.
Exhibit #4
To determine if there is a relationship between the change in the Fed funds rate and the annual change in Personal Interest Income, Exhibit #4 takes data on both of these series back to 1959. The relationship appears to be positive in that a higher Fed funds rate coincides with higher interest income and a lower Fed funds rate coincides with lower Personal Interest Income.
Falling interest income translates into falling personal income that threatens any economic expansion since the consumer accounts for over 70% of gross domestic product. The following exhibit provides insight as to how personal income drops as the Fed funds rate falls and, when the Fed funds rate increases, personal income rises.
Exhibit #5
The commitment to keep interest rates low by Federal Reserve Chairman Bernanke suggests that conservative investors will continue to have a difficult time in maintaining their living standards if they are experiencing a reduction in income due to low interest rates.
We have shown that low interest rates are counterproductive as personal income falls during low interest rate environments. Simultaneously, bank loans remain weak thus detracting from the perceived commercial benefit of those low interest rates. Other stimulus such as an expansive fiscal policy must be relied upon to trigger an economic expansion. Monetary policy has been ineffective in achieving this goal.
June 25, 2009
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July 6th, 2009 at 11:31 am
i forgot to mention tsy tarp profits are draining financial assets as well
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July 7th, 2009 at 11:44 am
Hi Tom…..how about a followup stating that its fiscal, not monetary policy that drives the economy while citing the fiscal drains as you’ve done?
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July 8th, 2009 at 2:09 pm
To GeorgeR
Fiscal policy is two pronged; spending and taxing. Current increases in spending act as a safety net under private sector spending until the private sector recovers. Similarly, taxes are also a fiscal lever. Lower taxes are one way to increase private sector participation in the economy. Raising taxes has the opposite effect. Investors should be concerned about 1/1/11 when the Obama tax increases take effect. Those tax increases will undoubtedly act as a brake on the nascient economic recovery.
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GeorgeR Reply:
July 10th, 2009 at 8:26 am
Yes, fiscal policy, and that it’s not monetary policy that drives the economy.
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July 10th, 2009 at 1:39 pm
Thomas, Warren has proposed for the federal government to buy up many houses. I thought the problem with housing was foreign investors buying the houses or securities based on the houses and removing the local loan officer from having risk. Having the federal government buy houses gives even more power to our national government than they already have. How does that put risk back in the local loan officers lap and make the system efficient again?
I am for solutions that reduce government concentrations of power, not increase them. California has started in the right direction, issuing thier own currency, next they should declare thier succession plans from the USA. 50 nations with thier own currencies will make it much more efficient for currency traders to reward or punish states that are wasteful versus efficient and profitable.
Professor Brad Delong, a big supporter of Obama before the election is even confessing on his website this “recovery” is not helping unemployment much nor does it look like it will in the future either. As Warren often states, perhaps the administration is ignorant, or perhaps they are corrupt, but whichever they are, 50 seperate nations could deficit spend to help unemployment numbers better than 1 central government, the empirical evidence is all around us. And before we go implementing Mosler’s Plan for the US government to buy up houses, perhaps we should give the houses to states or even to cities so that more local authorities with better local information can make efficient decisions instead of the wasteful ones coming from far away on mt. olympus.
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July 11th, 2009 at 12:04 am
remember ‘buying up houses’ is buying them after they are fully foreclosed and only when the former owner wants to remain in the house as a renter at fair market rent (agreed, a problematic concept). the govt would somehow pay the lower of market value or the remaining balance owed to the lender.
i don’t see this giving any power to govt that is of concern?
i find this far more attractive than the other mtg support proposals I’ve seen, and the least disruptive to the private sector.
and if the govt hadn’t allowed agg demand to collapse there would be no call for it.
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Aggregate Demand Management Reply:
July 11th, 2009 at 2:25 am
“i don’t see this giving any power to govt that is of concern? ”
My granpappy had a farm, and on that farm he grew some corn. And when he went to sell his corn the big landowner next door had 1000 as much corn and dumped it all on the market right before my granpappy sold. So my granpappy went bankrupt and the big corn guy got my granpappys farm. Only that big landowner didn’t really dump his corn, he just threatened too, and that bounced the prices all around. He did this several times till he owned all the land in the valley. In the mortgage market of the USA today, how many loans are made that the big GUBBMINT doesn’t backstop or control directly or indirectly?
“i find this far more attractive than the other mtg support proposals I’ve seen, and the least disruptive to the private sector. ”
The private sector? Did you go to the angelo mozilo school of urban development? You are a banker aren’t you Warren? You must be the only florida banker I know who hasn’t told me that fannie and freddie have so RUINED the private housing mortgage market that it is a total FARCE that there is really any PRIVATE markets there.
“and if the govt hadn’t allowed agg demand to collapse there would be no call for it.”
I think it is becoming more clear to me your myopic tunnel vision. To you the big fed “GOVT” is the solution to everything if it makes the right decisions. Is there any scenario where busting up the big government into smaller manageable portions would fly in your reality?
You don’t seem to be able to agree perhaps at some LARGE SIZE any DECISION government makes is bad, because the government itself consumes so many USEFUL resources coming to that decision. People, energy, resources, etc etc
You say “if they govt hadn’t ALLOWED agg demand to collapse” Good LORD Warren, who is the US government to be GOD over 300 million people’s aggregate demand, 500 congresspeople and a few select cronies deciding for 300 million, that is the CORE of the problem, they have too much power already, are too big, and too inefficient – as you constatnly point out here, hillary says one thing, that contradicts what giethner says, that contradicts what obama says, that then contradicts what Bernanke says – too much damn government, too big, and too inefficient with the right hand not knowing what the left hand is doing and contradicting it all over the damn place!
Why should california remain part of the union? The big gubbment didn’t come through for them, so why not split off? My old economy professor told me the REAL reason for a big national government is military protection from invading armies and transfer payments from the rich to the poor. Well I don’t think zimbabwe or russia is going to invade California anytime soon, so that kills 1 reason for them to stay in the Union. And it doesn’t seem the transfer payments are doing much for them right now.
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July 11th, 2009 at 5:59 pm
go back to the mandatory readings
the currency is a public monopoly
if govt keeps taxes too high for a given amount of spending the evidence is unemployment and excess capacity in general
the govt slaps a tax on us and then tells us what we have to do to get the funds to pay or taxes.
agg demand is a nominal concept that comes from the govt’s monetary operations of their currency
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