2009 October 05 Monday
High Savings Rate Or Another Bubble?

Get prudent or throw another party?

Savings will continue heading up, perhaps to 8 percent or beyond, some economists say.

“I am unprepared to make numeric predictions without working out some solid numbers, but this sounds right,” writes Jonathan Parker, a finance professor at Northwestern University, in an e-mail. “Why? First, to close the trade gap in normal times (in an accounting sense) would require a saving rate of around 8 percent. Second, more typical saving rates in the US historically are around 8 percent.”

But in August, the personal savings rate fell for the third month in a row to 3 percent of disposable income, the Commerce Department reported Oct. 1. The monthly numbers can jump around a good bit, economists warn: Perhaps consumers were temporarily lured out of savings mode by the “cash for clunkers” program, for example.

But why did the savings rate decline? One possibility: China and other countries forced the US to run a big trade deficit. Then the US government over-inflated the currency in order to get people back to work in spite of manufacturers and even service industries shifting jobs abroad. The loose money policy drove up asset prices and made people think they were wealthier than they really were. People took out second mortgages and saved less as equity markets became overvalued along with housing. Eventually the bubble popped. Bummer.

The American people are crying out for a new bubble that will allow them to avoid living prudent lives. Ian Bremmer and Nouriel Roubini argue that it is hard to avoid a bubble when recoveries are weak. But why are American economic recoveries increasingly weak? Economists do not ask this question enough. But it is the key question. Could the nation be in decline?

As for the exit from monetary easing, the Fed must learn from the fateful mistake it made after the 2001 recession. Then, the central bank cut the federal-funds rate too much and kept it too low for too long. It also moved far too slowly when the normalization occurred—in small increments of 0.25% from summer 2004 until the summer of 2006, when it peaked at 5.25%. Normalization took two full years. It was in that period of slow normalization that the housing, mortgage and credit bubbles spiraled out of control. The lesson learned: When you normalize, move rapidly, or prepare for another dangerous bubble.

Of course, this is easier said than done. From 2002 to 2006, the Fed moved slowly because the recovery appeared anemic and because of significant deflationary pressures. This time around, the recession is more severe—unemployment is at 9.8% and is expected to peak above 10%, and we are experiencing actual deflation. Therefore, the incentive not to exit too soon will be greater and the risk of creating another bubble is greater. Indeed, the sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation.

We need to address root causes. What are the root causes of America's decline? Got some answers?

Share |      By Randall Parker at 2009 October 05 10:51 PM  Economics Business Cycle


Comments
glenn beck said at October 5, 2009 11:32 PM:

Since you asked...........

1.) Growth in the national debt and household debt
2.) Shifting ethnic demographics that are depressing our human capital
3.) Excessive government intrusion in too many areas, such as mortage policy
4.) Outsourcing of our manufacturing base
5.) Growth in our national underclass, which is exacerbated by immigration

Solutions?

1.) Cut spending radically, raise the age of receiving Medicare and SS. Also, perhaps create some type of laws or incentives that encourage Americans to save more money.
2.) Cut back on immigration, pay lower income women to get sterilized or at least limit their fertility
3.) Embrace Reaganism and roll back the reach of government, especially the odious Community Reinvestment Act
4.) Implement Asian-style economic policies that reward labor-intensive manufacturing and create some type of incentives
to not offshore
5.) Again, cut immigration and do something about birthrates among the less capable. Also, as Half Sigma insists, teach middle class values in schools. Addotionally, lengthen the school day
and bring more discipline into the schools, which will help us increase academic achivement and discourage costly deviant behavior.

glenn beck said at October 5, 2009 11:33 PM:

Since you asked...........

1.) Growth in the national debt and household debt
2.) Shifting ethnic demographics that are depressing our human capital
3.) Excessive government intrusion in too many areas, such as mortage policy
4.) Outsourcing of our manufacturing base
5.) Growth in our national underclass, which is exacerbated by immigration

Solutions?

1.) Cut spending radically, raise the age of receiving Medicare and SS. Also, perhaps create some type of laws or incentives that encourage Americans to save more money.
2.) Cut back on immigration, pay lower income women to get sterilized or at least limit their fertility
3.) Embrace Reaganism and roll back the reach of government, especially the odious Community Reinvestment Act
4.) Implement Asian-style economic policies that reward labor-intensive manufacturing and create some type of incentives
to not offshore
5.) Again, cut immigration and do something about birthrates among the less capable. Also, as Half Sigma insists, teach middle class values in schools. Addotionally, lengthen the school day
and bring more discipline into the schools, which will help us increase academic achivement and discourage costly deviant behavior.

Snouck said at October 6, 2009 2:08 AM:

Randall Parker: Could the nation be in decline?

Glenn Beck: 2.) Shifting ethnic demographics that are depressing our human capital

In The Netherlands the issue of the financial decline of the nation as a result of mass immigration has now become political.

`In the last month Freedom Party MP (PVV) Sietse Fritsma has been asking Dutch government ministries what their immigrant related costs are and how they relate to the costs of native Dutchmen. He has also asked questions about the revenue of the state related to immigrants. He has forecast the result that immigrants ON AVERAGE cost more than they bring in.´ http://www.islamineurope.net/2009/07/borjas-question-do-immigrants-pay.html

The question by the Freedom Party (PVV) about the cost of immigration was not answered by Eberhard van der Laan, the responsible Minister. Despite the fact that article 67 of the Constitution instructs ministers to answer questions from Parliament. Mr. van der Laan argued that he did not want to devide the population in groups and have costs and revenues calculated accordingly.

A mainstream Dutch magazine Elsevier calculated the cost of immigration at 13 billion Euros annually out of a 877 billion GDP. The tally was a total of 216 billion, for a limited number of items, excluding for instance the total damages of the high immigrant crime rates.

The resistance against calculating and making public the costs of colonization by non-westerners of The Netherlands is strong. The PVV is going to make it one of the most important issues in their campaigns and is now connecting the issue to the age that citizens can start their pensions. The other parties want to raise this age in order to counter the effect of the aging of the population. This will extent the interest of the electorate from to right wing voters to include left wing voters and possibly make the PVV a national party.

All Western countries will have to deal with these questions eventually. The decline of economies and the resulting inability of the state to provide income and services to its clients will force these issues to the forefront.

Regards,

Snouck

James Bowery said at October 6, 2009 6:08 AM:

There are two, closely related, phenomena:

1) Hamilton, W.D. (1975), Innate social aptitudes of man: an approach from evolutionary genetics, in R. Fox (ed.), Biosocial Anthropology, Malaby Press, London, 133-53:

The incursions of barbaric pastoralists seem to do civilizations less harm in the long run than one might expect. Indeed, two dark ages and renaissances in Europe suggest a recurring pattern in which a renaissance follows an incursion by about 800 years. It may even be suggested that certain genes or traditions of pastoralists revitalize the conquered people with an ingredient of progress which tends to die out in a large panmictic population for the reasons already discussed. I have in mind altruism itself, or the part of the altruism which is perhaps better described as self-sacrificial daring. By the time of the renaissance it may be that the mixing of genes and cultures (or of cultures alone if these are the only vehicles, which I doubt) has continued long enough to bring the old mercantile thoughtfulness and the infused daring into conjunction in a few individuals who then find courage for all kinds of inventive innovation against the resistance of established thought and practice. Often, however, the cost in fitness of such altruism and sublimated pugnacity to the individuals concerned is by no means metaphorical, and the benefits to fitness, such as they are, go to a mass of individuals whose genetic correlation with the innovator must be slight indeed. Thus civilization probably slowly reduces its altruism of all kinds, including the kinds needed for cultural creativity (see also Eshel 1972).

and

2) Natural vs Taxable Rights:

Indeed, given the centralization of asset ownership that has resulted from the subsidy of non-subsistence property, a subsidy inherent in civilization, it may be the failure to use this tax base is the ultimate cause of the repeated decay of civilizations from ancient times.

Basically, the economic rent from cultural creativity has centralized in both government and private hands, and then been used to culturally replace the culturally creative population. This is being made permanent by genetically replacing the same population.

Girm said at October 6, 2009 6:24 AM:

We recover slower and slower because our debt increases at every level as we try to pull ahead demand to get going again. High levels of debt slows growth and the rate of debt creating just keeps accelerating.

Decline of America:
(1 Destruction of the American work ethic.
(2 Weakness of the US government in enforcing laws (note this is a weakness caused by people not caring about the laws)
(3 Replacement of productive workers with non productive ones (See useless HR departments, diversity workers, ect)
Many, Many more.

not anon or anonymous said at October 6, 2009 8:47 AM:

"But why did the savings rate decline? One possibility: China and other countries forced the US to run a big trade deficit."

China and other countries did not "force" the U.S. to do anything. The U.S. has increased its debt to foreign countries in exchange for cheap manufactured goods and not-so-cheap natural resources. This debt will have to be repaid sooner or later and the US will then run a trade surplus; but its creation by government and private households was entirely voluntary.

A.Prole said at October 6, 2009 9:57 AM:

Snouck,
There is an idiot called Philipe LeGrain (www.philipelegrain.com), who insists in the most forthright and pompous tones available that massive, uncontrolled third world immigration *benefits* the receiving nation.He's published a book to this effect.Frightenelly this jerk is an LSE graduate and a senior EU corporate apparatchik.

kurt9 said at October 6, 2009 12:11 PM:

Of course they are trying to puff up another bubble. After all, this is how we got out of the recessions of the early 90's and early 00's. So, why not again? They will keep trying to blow bubbles until the whole system collapses once and for all.

Quequeg said at October 6, 2009 8:54 PM:

This is an interesting article from 2003, which compares the economy to a student who's being encouraged to repeatedly pull off all-nighters.

"The Economy Pulls an All-Nighter"
http://mises.org/story/1340

"Let's say the student is only permitted a few hours sleep before he is awakened again, perhaps by a phone call from his teacher. He is told that he must do revisions. He gets to work on them but, again, the student underperforms. So he is awakened again to undertake more revisions. This wake-sleep pattern continues as the student enters into a long decline. This is an interdeterminate stage of the cycle that corresponds very closely to what in economics is considered a secular stagnation of underperformance punctuated by bursts of positive signs which only lead to disappointment. The policy authorities try every method to "get the economy going" again (deficit spending, more inflation, protectionism, etc.) but the positive effect, to the extent there is one, is always short term. This seems to correspond to where the US is today."

AMac said at October 6, 2009 9:11 PM:

In 1948, Henry Hazlitt concluded the first section of Economics in One Lesson by noting that key lesson.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

From Bastiat's broken window to Cash for Clunkers, people haven't put much effort into understanding this sort of common-sense idea. With the slo-mo train wreck of Health Care Reform, we see the governing and media elites actively scorning such concepts, on behalf of all of us.

Randall Parker said at October 6, 2009 9:43 PM:

Quequeg,

The weakness of the last business cycle makes me think the Fed really is just whipping a tired horse. The amount of debt has gotten so large. The demographics have gotten so bad. Now Peak Oil is getting near.

AMac,

I fear we've lost a national critical mass of prudence. The rise of total government debt is breathtaking. This isn't happening during a war (at least not during a big one). So there's no relief coming once the war ends. The same demographic changes that are driving up the debt will only become worse in future decades.

sg said at October 8, 2009 11:26 PM:

My niece's charter school has mandatory longer school day. The low achievers get more skills practice and competent kids get fun stuff like ballet lessons or playing on one of the school's soccer teams, or go home.

sg said at October 8, 2009 11:34 PM:

Okay, I forgot to quote the idea I was responding to:

"Additionally, lengthen the school day and bring more discipline into the schools, which will help us increase academic achivement and discourage costly deviant behavior."


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