INTEGRAL ECONOMICS

Saving Themselves
Daniel O'Connor | Integral Ventures, LLC

With growing profits and relatively weak capital investment

over the past several years, businesses have become net
savers in the global economy, a signal that the apparent
economic recovery may be weaker than it appears.
Saving Themselves

Daniel O'Connor | Integral Ventures, LLC

In the midst of declining rates of saving in Firms have been net savers for the odd
developed economies, led by their respective year in the past, but a run of several years
household sectors,1 it appears that businesses have is highly unusual. Since 2002 American
been bucking the trend and actually increasing their firms have had an average net financial
saving. With growing profits and relatively weak surplus of 1.7% of GDP, compared with an
capital investment over the past several years, average deficit of 1.2% of GDP in the
businesses have become net savers in the global previous two decades. Corporate Japan has
economy. As reported yesterday in The Economist, run an average surplus over the past three
J.P. Morgan considers this one of the major factors years of no less than 6.2% of GDP,
underlying the conundrum of surprisingly low long- compared with an average deficit of 2.3%
term interest rates in this era of apparent economic in the 1980s and 1990s. In fact Japanese
growth and monetary tightening. firms have been in financial surplus since
1994, desperately trying to reduce the
Beyond the usual suspects for these low long-term
debts they built up during the bubble
rates—a reduction in inflation expectations, an
economy in the late 1980s. Corporate cost-
impending recession, and/or a migration to the
cutting—in both capital spending and new
relative safety of government bonds—the hypo-
hiring—has been a persistent drag on
thesis gaining the most attention in recent months
Japan's growth rate. The good news is that
is Ben Bernanke's account of the "global savings
corporate debt as a percentage of GDP has
glut" in emerging economies.2
fallen to the level of the mid-1980s, before
Following a series of financial crises, these the bubble really inflated. Now American
economies slashed investment and swung and European firms seem to be following in
from a combined current-account deficit of the footsteps of the Japanese, having been
$93 billion in 1996 to a surplus of $336 forced to cut back on borrowing after a
billion last year. Since bond yields should binge in the late 1990s.
reflect the demand and supply for funds,
this increase in net saving could indeed
have reduced yields. However, a new study
It is hard to imagine how even the
by economists at J.P. Morgan concludes carefully crafted appearance of
that in recent years an increase in saving economic growth can be sustained
by companies in developed countries has in the long-term without household-
been far more important than emerging funded increases in business
economies' thrift. investment that yield greater
Over half of emerging economies' huge productivity in service of greater
swing from external deficit to surplus had future household consumption
occurred by 2000. However, American bond based, as it should be, on past
yields were roughly the same in that year
as in 1996; the big decline in yields is more
saving rather than more borrowing.
recent. Since 2000, the corporate sector
has stood out. Companies in the main
Of course, the standard logic of economic growth
developed economies have switched, as a
reveals that households should, on balance,
group, from being big borrowers to being
be saving while business, on balance, invest, with
net savers: ie, their profits exceed their
the dynamic interaction between the supply and
capital spending. The total increase in
demand for funds being mediated by interest
companies' net saving in the past four
rates—the market prices of saving and invest-
years has been more than $1 trillion, 3% of
ment—determined according to the value functions
annual global GDP and five times the
of households and businesses. Often in the midst of
increase in net saving by emerging
a recession in which value functions shift, house-
economies over the same period. J.P.
holds choose to defer consumption in the present in
Morgan estimates that about half of the
favor of greater consumption in the future, with the
gap between the current real yield on
resulting increase in saving funding business
American ten-year Treasury bonds and its
investment in the additional capital that will, in
average since 1960 is due to this increased
time, yield the greater product for which
corporate saving.

Page 1
households have been saving. Each sector has a
critical role to fulfill in the overall process.
Perhaps business executives have
learned from the last business cycle
that market prices, when distorted
by central bank monetary policies
and credit-based monetary
inflation, can provide false signals
regarding the attractiveness of
long-term investments.
It is therefore troubling to note a three-year-long
reversal of this traditional growth dynamic during
the first three years of a reported economic
recovery, wherein businesses are apparently defer-
ring investment in the present in favor of greater
investment in the indeterminate future, with the
resulting increase in business saving being used to
fund greater household consumption (which, out-
side the Washington beltway, is generally not
considered a "growth" activity) and to some extent
greater household investment in housing itself
(which is putting it optimistically). It is hard to
imagine how even the carefully crafted appearance
of economic growth can be sustained in the long-
term without household-funded increases in busi-
ness investment that yield greater productivity in
service of greater future household consumption
based, as it should be, on past saving rather than
more borrowing.
This begs the question of why business executives
around the world have chosen to moderate their
capital investment despite such attractively low
costs of capital? Apparently, many businesses flush
with cash and with access to credit still cannot find
strategic opportunities deemed worthy of a com-
parable degree of capital investment. To the extent
Daniel O'Connor is the managing director of Integral
Ventures, a strategy consultancy committed to foster-
ing more innovative and sustainable ways of doing
business. He has been a pioneer in the development of
integral praxis in business and economics, having
authored numerous articles and essays in this
emerging field.
email: daniel@integralventures.com
website: www.integralventures.com
Page 2
that executives are thinking clearly, they must
expect risk-adjusted returns on these bypassed
investment opportunities to be even lower than the
risk-adjusted returns expected on the very low-rate
government bonds they're choosing to hold instead.
What might they know that many householders
apparently do not? Perhaps business executives
have learned from the last business cycle that
market prices, when distorted by central bank
monetary policies and credit-based monetary
inflation, can provide false signals regarding the
attractiveness of long-term investments. Maybe
they have added a few points to their hurdle rates
of return to account for the additional risk of a
mounting instability beneath the veneer of state-
managed economic stability.3
In other words, perhaps business executives are
just saving themselves from the usual suspects: an
impending recession, which justifies a migration to
the relative safety of government bonds, given that
both stocks and housing are likely to suffer in any
such recession and governments may engage in
increasingly unilateral and therefore destabilizing
policies of monetary reflation, currency devaluation,
and deficit spending.
This July 2005 work is licensed under a Creative Commons
Attribution-Noncommercial-No Derivative Works 3.0 License.
1
Daniel O'Connor. (2005). “Saving Ourselves.” Catallaxis.
http://www.catallaxis.com/2005/04/ can_we_save_our.html.
Retrieved July 8, 2005.
2
The Economist. (2005). “Saving by Companies.” The
Economist. July 7, 2005. http://www.economist.com/finance/
displayStory.cfm?story_id=4154491. Retrieved July 8, 2005.
3
Daniel O'Connor. (2005). “Stable Instability.” Catallaxis.
http://www.catallaxis.com/2005/02/stable_instabil.html.
Retrieved July 8, 2005.
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