Government figures put US savings at 0.3% of income. Two recent articles (Are Spendthrift Americans Really the Problem? in the New York Times, and A Savings Crisis? Maybe Not in Business Week, state that the alleged low savings rate in the US is either mis-measured or not a problem anyway.
The charge of mis-measurement may carry some weight. Certainly, pension contributions and retained earnings of business are savings (however the use of retained earnings to “enhance shareholder value” through stock buybacks to offfset option dilution is not savings). The remaining content of the articles is a hopeless muddle of economic illiteracy and fallacies. Savings in the economic sense means abstaining from a consumption opportunity, and instead, transferring the purchasing power (or goods saved in a non-monetary economy) toward the creation of producer goods, otherwise known as capital. In an advanced economy, nearly all of our ability to consume comes from the productivity of capital goods. Without capital we could consume only what we could gather in a day. Regular savings is necessary to maintain the existing stock of capital as it wears out, and additional net savings is required if more capital is to be created. In a society with no savings, all of the capital will eventually wear out and the people will be gradually impoverished.
- Contrary to Fed Governor Ferguson, asset price appreciation is not savings in the economic sense. It is only a change in the market valuation of capital produced with past savings. If asset prices increase, then the holders of those assets are better off relative to those who do not hold them, but there is no net new savings.
- Spending is not savings. Some expenditures consist of the spending of savings, such as business spending on a new plant, or perhaps R&D. But the money must have first been saved in order to be spent.
With a fractional reserve banking system, the total amount of money borrowed is much greater than the amount saved because banks create debt as they create more money. If all the money that were borrowed were invested in capital goods creation, then investment would exceed voluntary savings. The newly created debt-money is used to bid for factors - land, labor, and complementary capital. In the end, there is “forced savings” as some of the debt-money bids away factors from consumers or early stage capital investments.
- One of the most popular recent fallacies is the idea that we Americans don’t need to save any more because “foreigners will do it for us.” This is about as helpful as having someone else exercise for you. Because there now exist international capital markets, the argument goes, and foreigners save, they can send us their savings and we can then consume all of our income without the need to postpone any consumption at all.
This is true subject to two provisos: if we are happy to sell them all of our productive assets in exchange for present consumption, or so long as foreigners are willing to take phony IOUs that will be defaulted before they can be redeemed, we can consume their savings. In both cases, though, America will become impoverished as our capital strucure wears out and is not replaced and find ourselves unable to borrow any more and unable to produce anything.
It would be true that a country that does not have savings can still grow if savings are imported from the rest of the world and spent on productive assets such as new product development, factories, mines, agriculture, etc. However, most of the so-called foreign “investment” in the US is for the purchase of US Treasuries - government debt used to fund government consumption — or agency bonds — bonds issued by the mortgage GSEs for residential housing, another consumption good.
- Finally, savings may be a moral question, but it is certainly an economic one.
