The world has a glut of savings.
There is too much surplus cash in this world.
You might think that’s a problem you’d like to have, but actually, it’s causing massive global financial instability, and that’s a problem.
The result is that we need to talk about what’s going on, where is it going on, how big is the problem, what are the consequences, and what can we do about it? These questions all need answers because the world’s savings glut might cause the world’s next financial meltdown.
A savings glut is a simple situation where there is more cash, in particular cash, being saved in the world, in excess of the world’s desire for investment.
Stop printing money maybe?
That, obviously, is too simple.
Sheesh:
The United States is the biggest borrower, but that’s not really because it borrows; let’s be clear about it. Its $36 trillion national debt does in part exist because people like Donald Trump have insisted on running the US government on the basis of deficits, because he’s so keen to give tax cuts to the wealthy. But the real reason why the US runs such a big deficit is because the rest of the world wants to literally buy its dollars. They will give people in the US goods and not actually basically convert the resulting dollar balances that they create into their own domestic currencies, and trade imbalances arise as a result.
Trade deficits are nothing – nothing at all – to do with budget deficits. He’ll be eating his mind map crayons next.
Oh, and, of course:
But there is no shortage of tax revenues to deal with these issues. The world’s savings are not taxed enough. We could tax them more. We could, as a consequence, collect all the money that is required to ensure that, literally, the world’s problems can be solved.
MOAR TAX!
Ultimately, though, we need to increase investment. Investment to save the planet with green, tax-incentivised funds.
Why not reduce the regulatory burden which makes investing unprofitable? Thereby increasing the willingness of those with savings to invest? But that would mean less direction of the global economy by the Sage of Ely – not an allowable policy choice therefore.
“Its $36 trillion national debt does in part exist because people like Donald Trump have insisted on running the US government on the basis of deficits, because he’s so keen to give tax cuts to the wealthy.”
It is always the Bad Orange Man, isn’t it.? In his first term, Federal borrowing under Trump increased by just over $8.2tn, of which about $3.7tn is attributable to Covid. Net = $4.5tn give or take. Federal borrowing under Biden increased by $7.7tn, of which about $2.2bn is attributable to Covid. Net = $5.5tn give or take. So far in this term, Federal borrowing increases under Trump are under $0.4tn.
Yes, tax breaks for the rich under the Bad Orange Man is really the thing to highlight here to get to the crux of the story.
It’s my money. I paid tax on it. If you try to tax it again, it will be gone.
(I notice now his tax greed has gone global. But there isn’t a global tax regime. Who would we trust to administer that? Some noble leader from the Wabenzi tribe, or the Sage of Ely.)
“The world has a glut of savings”
Except for feckless peasants like you mooching off everybody you can.
“There is too much surplus cash in this world.”
And it’s not yours is it? Which causes the burning envy and resentment we see every day.
“Trade deficits are nothing – nothing at all – to do with budget deficits.”
They’re not identical, but there is a relationship.
If there’s more goods and services going in one direction, there must be more money going in the other direction. You export to earn the money that you spend on imports. The US is importing more goods and and services than they export, so they are spending more than they earn, and they’re borrowing to cover the difference.
You can see the same effect at work if you draw the boundary around a single household. When you go to work, you’re ‘exporting’ your labour and earning wages for it. When you go to the supermarket you’re ‘importing’ groceries and paying at the till. If the groceries imported are worth more than the work exported, that’s a trade deficit, and it implies that you are spending more than you are earning. It happens because you are spending more than you are earning. A trade deficit is identified with a spending surplus.
The government deficit draws the boundary around the federal government, and the US trade deficit draws the line around the entire US economy, so they’re different things. However, they are both the same sort of thing, and the government by borrowing from abroad to cover its spending is contributing to the latter.
The US trade deficit last year was about $140 billion. The federal deficit is projected to be about $1.3 trillion this year. If 10% of that federal deficit was funded by borrowing from abroad, you would have an inflow into the US of $130 billion in money which has to be spent abroad by importing $130 billion more goods than you export. If you don’t spend it, then the dollars are sucked out of the rest of the world and pile up in America, increasing their value abroad (short supply raises prices) and decreasing their value in America (excess supply lowers prices). When the value of dollars goes up, the price of everything else measured in dollars goes down, and vice versa. The exchange rate would make importing into America even cheaper and exporting even more expensive, driving the economy even harder towards a bigger trade deficit.
If the US wants to stop importing more than they export, they have to stop spending more than they earn, and borrowing from abroad to cover the difference. The government is one of the worst bits of the US economy for doing that.
Trade deficits are nothing to do with budget deficits?
Isn’t it precisely the trade deficit that enables the government to run an immense budget deficit that would be unsustainable in any sane universe? Ameribro buys $1000 of Chinese tat, Chinese government (yes, they don’t really play free trade there to be honest) spends $100 on cost of sales and buys $900 of American bonds?
A model that will, of course, only last as long as there is demand for dollar bonds, which seems to be drying up faster than anyone expected.
What am I misunderstanding?
No, you can always fund the trade deficit by selling actual assets. Houses, companies, whatever. There’s zero – wholly zero – reason it must go into Treasuries.
That some of it does go into Treasuries, sure, agreed. But it doesn;t have to. Therefore the trade deficit isn’t causing the budget deficit.
The trade deficit is – always – covered by the capital surplus. Sure, some of that capital surplus can be foreigners buying Treasuries. It is. But it’s wholly possible to run a budget surplus and also a trade deficit (the UK has done it a couple of times).
That the two are connected, sure, but one doesn’t *cause* the other.
No, you can always fund the trade deficit by selling actual assets. Houses, companies, whatever. There’s zero – wholly zero – reason it must go into Treasuries.
I remember the Japan Scare of the 1980s which might have reached its zenith when a company “bought” Rockefeller Center. (Technically, a majority stake in the company that managed Rockefeller Center.)
We all know how that worked out for Japan the last third of a century.
The Nordic countries have solved Tattie’s problem with tax rates so high that saving to create a passive income results in your money actually going backward after inflation. As Donald would put it, Big, Beautiful Tax.
Agree you _can_ fund it that way and much does happen that way.
Presumably it would also be good and sensible and rational economics to sell my house and eat caviar for a year.
America seems to have the best of both worlds. Selling the family silver and racking up tons of debt so democratic NGOs can live high on the hog for a while. Nothing at all can ever go wrong. Those bonds at 5% aren’t telling a different story at all.
We could, as a consequence, collect all the money that is required to ensure that, literally, the world’s problems can be solved.
More money increases the demand for goods not the supply. Stealing savings increases the demand for goods too and not supply as people will spend rather than “save”. The worlds problems stay much the same but inflation and falling output get added to the list.
I take it, then, that Lord Spud has too much savings, and he’s going to send them off to HM Treasury.
Incidentally, once you have one owner of sufficient of your debt that they could simply by dumping loads of that debt on the market effectively take you out, bankrupt all your banks, make your government unable to function, force every homeowner’s mortgage repayments through the roof, trash your currency, etc, and then offer to save the world by lending a fully negotiable Renminbi in its stead, you have a serious problem.
Some economists seem to live in a rational fantasy world in which everyone acts at all times in immediate rational self interest (missing the point that much of economics is about capturing or generating the resources to do economically irrational things, like eating caviar instead of eggs), and in which a country like China would never do that. Because it would cause them some economic hardship. I’d suggest they haven’t understood what China wants, how much it is still a centralized command economy with a thin veneer of private ownership, how it operates, or that it just likes the idea of having power.
I do wonder what those in favour of “reparations” think will happen the morning after those trillions are paid out.
China’s third largest – behind us and Japan https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html
Approximately 20 years late he discovers Ben Bernake’s Global Savings Glut Hypothesis. That hypothesis is that people in the lesser developed countries save in the developed countries because there’s no good vehicles, or institutions, for saving for retirement, etc. in those lesser developed countries.
It should be intuitively obvious that taxing that glut makes lesser developed countries even poorer.
Let me explain commie dick Murphy to you. Wealth is a proxy for freedom, which hates.
‘The world has a glut of savings.
There is too much surplus cash in this world.’
Translation: There’s too much freedom.
‘You might think that’s a problem you’d like to have, but actually, it’s causing massive global financial instability, and that’s a problem.’
‘Instability’ is what he calls people’s ability to choose. The solution to instability is collapse of the world economy. There is no instability in a gray, dystopian world.
Does it not occur to any of these clowns that the Western and industrialised worlds are entering a glut of pensioners, who are about to draw down – i.e. spend – that glut of their savings, thereby stimulating demand? The problem with that is the relatively few young ‘uns educationally, culturally, and physically able to supply the goods and services demanded, not the lack of cash.
If the government in this country wanted to do something actually useful and helpful it would be to make it as cheap and easy as possible for pensioners to liquidate their assets, and in particular to downsize and relocate. Everyone wins.
But no.
@BiG
“…then offer to save the world by lending a fully negotiable Renminbi in its stead…”
Aye, there’s the rub, a fully negotiable Renminbi. I do not see any CCP government in China willing to float its currency, even for the reward of beggaring the United States. This is why the alternative currency that the BRICs keep mooting will never happen.
“Therefore the trade deficit isn’t causing the budget deficit.”
I agree the trade deficit isn’t causing the budget deficit. I was thinking it was the other way round. Socialist welfarism, political corruption, and gross inefficiency are causing the budget deficit, and the budget deficit is contributing hard to the trade deficit.
“That the two are connected, sure, but one doesn’t *cause* the other.”
Sure. Money is fungible, and nothing is ever simple in economics. There are lots of other ways the US borrows from abroad.
But if you’re spending more than you’re earning and the credit card debt is rising, you do have to take a hard look at mommy’s out-of-control vodka purchases, and not blame it all on the supermarket offering ‘unfair’ buy-one-bottle-get-one-free trade deals to try to grab more of your money (“Darling! Look at how much money I just saved you in the sales!”), or saying it’s completely unrelated.
If the US government stopped spending money it doesn’t have like a drunkard, it would be a lot easier to balance trade. That’s all I’m saying.
China’s merely the third largest holder.
But still enough that by dumping their entire holdings they could bugger the US, UK, and Japan all in one go? For a few decades?
As in, certainly the cases of UK and Japan famine-level buggering?
I merely wonder what’s stopping them.
Maybe because the coercive power is more cheaply exercised to more immediate effect by pulling Diego Garcia and Ukrainian rent boy strings.
There are few better commentators even among stiff competition o here than Martin near the M25 and he nails it completely.
‘There’s a glut of savings’
– some of that money should be his And he should not have financial worries.
‘used properly, that could solve many of the world’s problems’
– and of course whom should be doing it is self – evident
Evil is eternal and it never sleeps
Also Gamecock has a jib whose cut is hard to argue with
Murphy is a Stalinist. Like most of U.K. Higher education,!with the DIE, LGBT Alphabet Soup Child molestation and Net Zero overlay his policies are well to the Left of North Korea.
He despises freedom (other than his own to control) and as such is a very dangerous man. His ideologies will need to be taxed and legislated into non- existence if civilisation is to be preserved.
@ BiG
Dumping all that debt on the market would depress the price making *China* poorer and improving the returns to the guys who bought it. It won’t bankrupt the USA because the USA’s liability to repay the debt at par at some date in the future is unchanged. It won’t bankrupt any prudent banks because no prudent bank holds long-term government debt (the price volatility in normal times makes it a “no-no”) – banks hold short gilts or short T-bills (or the local equivalent in other countries.
It may well be what the US President and Congress deserve – but it just won’t happen.
The only significant damage to the USA would be to jack up the interest rate on any new debt that it was going to issue for a few months until people had forgotten about it. Offsetting such (relatively minor compared to your scenario) damage would be a short-term gain that the US Treasury could make by buying in some of the dumped debt at a discount from some sharp operators on the New York Stock Exchange giving them a quick profit from arbitrage.
I often wonder why that stuff about deficits, whether trade or government, never includes the value of stuff. Taking the household analogy, I earn it then I spend it buying, say, a gold bar. Or next-door’s garden. The money may be gone but the market value of my stuff is increased. Does the federal USA own stuff? Yes, loads of it, some appreciating. And land, lots of land under starry skies above. Equity, I suppose you’d call it.
True. But once you add in those asset values then someone’s going to insist adding in the net present value of promises about the future. A proper balance sheet. Pensions, future health care for retirees, etc.
Politicians tend to prefer not to do that.
@ rhoda
UK Public companies have to publish accounts containing a Balance Sheet, a Profit and Loss Account and a Cash Flow Statement. The Budget deficit and the Balance of Payments deficit are just cash flow statements. The assets are in the unpublished balance sheet.
[A profit and loss account would involve putting prices on deaths, disease, pollution etc and charging depreciatin on physical assets whose lifespan the government does not know until they wear out, fall down or are destroyed in a “redevelopment scheme”; a Balance Sheet would involve putting positive a negative values on everything in the country and all the UK’s overseas assets – even the Domesday book didn’t try to do that]
Savings are the deferral of consumption: for most of us that’s putting something aside for a rainy day or saving up to give us an income (or a lump sum we can draw down in our old age) – for the Duke of X it may include planting a woodland that his great-grandson (or if it’s an oak wood his great-great-great-great-great etc – grandson) can harvest. They were the “magic wand” that enabled our stone age ancestor to transition from hunter-gatherers to farmers who didn’t eat the seedcorn but planted it to grow another crop.
If there really was a glut of savings the world would enter a period of deflation, real interest rates would be negative *without government interference* and unsold goods would be piling outside Amazon warehouses and Walmart distribution centres.
I haven’t spotted any press reports of that
“like eating caviar instead of eggs”
What’s the problem, Corporal, the men seem unhappy?
Sir, the bramble jam tastes of fish.
>”people like Donald Trump have insisted on running the US government on the basis of deficits, because he’s so keen to give tax cuts to the wealthy.
Because there was no deficit spending, money printing, and tax breaks for the wealthy under the Obama and Biden administrations?
Also, the President doesn’t set tax policy in the US. You’d think someone who was once three-professors and who likes to pontificate on the US would know this.
“China’s third largest – behind us and Japan https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html“
That chart includes substantial balances for financial centres: Ireland, Luxembourg, Caymans, even the UK, etc. If numbers aren’t available on a look through basis, then that’s not so meaningful for this purpose (ie, exerting influence).
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