2003 July 08 Tuesday
Stephen Roach On Declining American Savings Rate

Morgan Stanley chief economist Stephen Roach sees continued decline in the US net national savings rate. (my emphasis added)

This is a story of arithmetic. The accounting identity is often the most powerful of economic constraints. Such a framework is not subject to theoretical interpretations -- the identities simply have to add up, year in and year out. For any nation, saving must always equal investment. Unfortunately, Americaís national saving rate is plunging into the danger zone. In the first quarter of 2003, gross national saving -- households, businesses, and government units, combined -- fell to 14.0% of gross national product; thatís down 1.5 percentage points from the year-earlier rate and fully 4.8 percentage points below the post-1960 norm of 18.8%. But thatís only the tip of the iceberg.

The problem is that most of Americaís national saving now shows up in the form of depreciation -- funds that are earmarked for the replacement of worn-out physical assets. In the first quarter of 2003, such depreciation accounted for fully 94% of total saving. That means that the net national saving rate -- that portion of national saving that is available to fund the actual expansion of productive capacity -- fell to a record low of 0.7% of gross national product in the first period of this year. Thatís off sharply from the year-earlier reading of 2.3% and is well short of the nearly 5% average of the 1990s and the 11% norm of the 1960s. There are few macro gauges that tell us more about an economyís internally generated growth capacity. Sadly, America has all but depleted its reservoir of net saving -- the sustenance of longer-term economic growth.

The savings rate is only part of the structural problem in the US economy. Think intuitively about what it means for the US to be running a 5% trade deficit. We are consuming 5% more than we are making. Now, there may be services trade that is hidden that makes that deficit smaller than it seems. But it is not sustainable. American living standards will effectively have to fall (or grow more slowly for a while) in order to bring that back into balance.

Roach thinks that the US net national savings rate may shrink to zero or even go negative while the trade deficit simultaneously widens. Roach expects further declines in the trade-weighted value of the dollar by as much as an additional 30%. Only a decline in the dollar can reduce US demand for imported goods and increase world demand for US goods enough to bring US trade back into balance with the world. That would have an inflationary effect on prices in the US and deflationary effects on much of the rest of the world.

Share |      By Randall Parker at 2003 July 08 12:28 PM  Economics Political

razib said at July 8, 2003 12:40 PM:

why isn't this a big issue??? i've heard about this for years, but why do we sweep it under the rug while talking about SS or medicare or what not?

Sean said at July 8, 2003 3:01 PM:

Contrary to popular wisdom, the trade deficit is not a structural problem - it's an accounting problem. When America exports $10,000 worth of computers to China - the accountants enter that as an export of $10,000. When the goods arrive in China they are sold for a profit and fetch $12,000. This is then used to buy $12,000 worth of Chinese goods. When these arrive back in the US the accountants enter an import of $12,000. Balancing the books gives a 'deficit' of $2000. But there isn't one - is there?

Randall Parker said at July 8, 2003 4:23 PM:

Razib, Even S.S. and Medicare funding do not get the attention they deserve. But, yes, the trade deficiit and the build-up of private sector debt also do not get the attention they deserve. I don't know what to say about this. I blog about all these things periodically. I like to deal with the big problems.

Sean, I've certainly read a number of articles on foreign trade measurement problems. But I do not think the measurement errors are coming as a result of what you argue. Also, we can track US holdings of foreign debt and stocks and foreign holdings of US securities and it sure looks like we are running a large trade deficit.

Sean said at July 8, 2003 7:03 PM:

Well, all I know is that we've been running a trade 'deficit' for 30 plus years and our economy remains the strongest in the world while Japan has run a 'surplus' and they're a basket case. Either the figures are bogus - or the predictions are false?

SteveG said at August 12, 2003 6:59 PM:

Sean. The trade deficit isn't a problem until foreign holders of U.S. securities realize that it is a problem. The recycling of their dollars into treasuries has aided the malinvestment into U.S. real estate by driving down interest rates. This co-dependant cycle is now showing strains as evidenced by the recent rout in the bond market.

Andy said at November 24, 2003 9:28 AM:

Sorry Sean - it is your problem. US does not export $10.000 worth of goods but only $6.000. But China exports $10.000 worth of goods. The difference is $4.000. An if you know say "What's the difference" I must say, you don't own $4.000, because your saving rate is 0% and your level of debt is high. Look at Levi Strauss, they don't produce any more Jeans within the States, and that is because your economy is no longer competitive. A service-oriented and deindustrialized society exports nothing, small wonder. Trade-restrictions are possible now but unfortunately US stands for free trade! The world recognizes that US policy is just made for their very own interests and nothing else.

Andy said at November 24, 2003 9:42 AM:

Some day China and also OPEC will switch to Euro currency and imagine - US economy depends on ECB currency policy. Could you imagine? No? But why shall European economy depend on US?

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