INTEGRAL ECONOMICS

Saving Ourselves

Daniel O'Connor | Integral Ventures, LLC

The unsustainable decline in household saving rates hasits origin in the monetary policies of the United States andsome of its trading partners.

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Saving Ourselves

Daniel O'Connor | Integral Ventures, LLC

Developed economies around the world are in themidst of a steady slide in household saving ratesthe pace and correlation of which may very well beunprecedented. A recent article in

The Economist

discussed this

shift away from thrift

IT MAY be a virtue, but in much of the richworld thrift has become unfashionable.Household saving rates in many OECDcountries have fallen sharply in recentyears. Anglo-Saxon countries — America,Canada, Britain, Australia and New Zealand— have the lowest rates of householdsaving. Americans on average, save lessthan 1% of their after-tax income todaycompared with 7% at the beginning of the1990s. In Australia and New Zealandpersonal saving rates are negative aspeople borrow to consume more than theyearn.Other countries with rapidly greyingpopulations—especially Japan and Italy—have also seen their personal saving ratesplummet, though from a higher level. TheJapanese today save 5% of their householdincome, compared with 15% in the early1990s. A few rich countries, notably Franceand Germany, have bucked the trend awayfrom thrift. Germans saved around 11% of their after-tax income in 2004, up slightlyfrom the mid-1980s.These shifts raise important questions. Arepeople saving too little? What are theconsequences of falling saving rates?Should governments try to encouragepeople to save more, and if so, how?What's interesting about these questions and themany answers floated by

The Economist

is the waythey skirt the essential question of

why

people aresaving so little. Granted, attributing causality toselected factors within a complex dynamic systemof interrelated factors is always difficult andcontroversial. Depending upon where we begin ourchain of logic, it often seems as though one factor'scause is but another factor's effect, with no cleardriving forces within the overall web of mutualcausality. Such is the market economy.Nevertheless, as I presented in Stable Instability

and as common sense confirms, we do not live in apure market economy. Not even close. Moreover,even though self-organizing markets can generateclear trends that reflect the gradual evolution of thevalue functions of market participants, I think thebest place to

start

the inquiry into such trends asthe saving decline is with the state's deliberateattempts to promote the appearance of economicgrowth. Cutting to the chase, I think we can look toour central banks and their profligate monetary

I think we can look to our centralbanks and their profligate monetarypolicies for much of the answer tothe essential question of whypeople are saving so little.

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policies for much of the answer to the essentialquestion of why people are saving so little.Generally speaking, as central banks use the policytechniques at their disposal—setting discount ratesfor central bank lending to banks, setting reserverequirements for banks' lending to households andbusinesses, engaging in open market purchases of government bonds, and shaping people's percep-tions of monetary policy and economic performance—to promote economic growth, they create newalignments of key economic factors that would nototherwise exist and cannot be sustained forever.For example, in recent years, the Federal Reserve'sinflationary monetary policy of lower short-terminterest rates and lower reserve requirements forcommercial lending has been met by similarlyinflationary policies of some other central bankswho, in order to support their respective exportsectors, have attempted to stem the dollar's naturaldepreciation in relation to their own currencies byaggressively purchasing US Treasury securities. Thecombination of these two opposing state inter-ventions has produced

lower-than-market interest rates

which, in turn, have created valuable incent-ives for households to

save less

borrow more

, and

consume more

. To the extent that the valuefunctions among householders have remained rela-tively stable, we can be sure that hundreds of millions of people have indeed saved less, borrowedmore, and consumed more than they would have if the central banks had maintained policy neutrality.At the same time, the central banks' inflationarymonetary policies have resulted in

lower-than-market costs of capital

for businesses, which havetherefore tended to

raise more

equity,

borrow more

debt

, save more

cash, and

invest more

in capitalgoods than they otherwise would have in theabsence of these policies. We might also add homeconstruction to this category of investment, whoseproduction certainly seems to have increased as aresult of the lower-than-market mortgage ratesoffered to builders and homeowners and the higher-than-market prices of mortgage-backed securities.These lower-than-market costs of capital haveresulted in

higher-than-market rates of appreciation

in the prices of many assets—e.g., stocks, bonds,houses—which are often touted by governmenteconomists as the

increasing savings

balances thatmore than offset any downside associated with the

decreasing saving

rates. In other words, as long aswealthier householders see the value of theirhouses, stocks, bonds, and others assets rising,even in the absence of any new saving, then allhouseholders as a group are considered to berelatively secure.Overall, with more consumption and more invest-ment, both funded with increasing degrees of leverage, we are seeing rates of US economicgrowth that are higher than what they would havebeen absent the monetary policy interventions.Further-more, US economic growth appears to beincreasing all the more so because of the growth indeficit-spending by the federal government, whichhas been fueled by lower interest rates for its owndebt obligations as well as the seamless monetiza-tion of its budget deficits as a critical component of the Federal Reserve's inflationary monetary policy.Such is the basic argument for the use of monetaryand fiscal policies—increases in the supply of moneyand credit and increases in deficit-financed govern-ment spending—to drive economic growth, parti-cularly in the midst of recession. So much thebetter if the US government can get foreign centralbanks to play along with them because of the USdollar's unique status as the leading global reservecurrency.The critical weakness in this proto-global-Keynesianpolicy, it seems to me, is that it relies on the

The critical weakness in thisproto-global-Keynesian policy, isthat it relies on the distortion of market prices—the observable,measureable results of past marketdecisions—in order to incent marketparticipants to make future marketdecisions that they would nothave made if they could havebased these decisions onvalid market rices.