The “Global Savings Glut” Is Conceptually Incoherent. “The Economy” Cannot “Save”

When you hear people talk about the Global Savings Glut, you can be quite sure they are talking about monetary “savings” — the global aggregate stock of money embodied in financial assets.

What they don’t seem to realize is that the net holdings of global financial assets minus liabilities — claims and counterclaims — is always exactly zero. By accounting identity.

Every financial asset is a claim against another party. For every asset (credit, claim) in the account of a financial-asset holder, there is a equal and opposite liability (debit, counterclaim) in the account(s) of some other party or parties.

Sum up all those assets and liabilities, and you get zero. The gross quantity of financial assets (and liabilities) can increase, but the net quantity always remains the same.

Here’s a physical example that might help make this clear:

Imagine an organism floating in space. It has one input (sunlight) and one output (heat). It’s able to convert the sunlight into stored mass and energy, with some loss in the form of heat. So it can grow, get larger, storing up mass and energy in various physical/chemical forms.

Now you could call that “saving,” but it’s probably better described as “growing.”

Now suppose that for whatever reasons, parts of that organism periodically run short of resources, while others are holding more than they currently need. The surplus holders can give resources to those who are short resources. The receiver notes down a new tally in a financial account book — a debt or liability. The giver records a promise, an asset. An IOU. A credit.

You’ve just created money.

An aside: it drives me crazy when people say that liabilities are money. They’ve got it exactly backward. When you’re holding someone’s IOU, you’re holding an asset, a credit. Think: a Target gift card. They’ve got an offsetting debit, a liability, recorded on their books. When you give the Target gift card to your brother-in-law, you’re not transferring the liability; it remains unchanged on Target’s books. You’re transferring a credit. Money is credit. I think that everyone will agree that in normal vernacular speech, money is an asset, not a liability.

Two new things are created by that transaction in space, ex nihilo: two tally entries on accounting books — the credit and the debit, the asset and the liability. (But no “real” things are created.) Together they increase the gross quantity of financial assets and liabilities (which are just tally entries, often represented by physical tokens), but have no effect on net aggregate “money savings.”

This transaction, of itself, has no effect on the organism’s creation or accumulation of new mass and energy from sunlight, or the loss via heat. It just changes different parts’ future claims on that mass and energy. So if you want to call that physical accumulation “saving” (rather than “growth”), you have to say that the transaction has no effect on saving.

And if you want to call the accumulation of accounting tallies “saving” (“money saving,” which is what most people think of when they hear the word), you have to say that the transaction also has no effect on net saving. There is no more net money in the world than there was before the transaction (though there is more gross money). That net number is still, and will always be, zero.

This is even true if a government prints, say, dollar bills and helicopter-drops them over the countryside. People pick up those credits, so it seems like there’s more “money.” And for the picker-uppers, there is — they have more credits against government liabilities (taxes and fees). But since they can use those credits to pay off liabilities to the government, the government has reduced its ability to demand the already-existing dollars out there through taxes.* While it’s increased the amount of credits out there, it’s reduced its power to demand (claim) existing credits back by an equal amount.

Once again: net zero.

So: there are massive quantities of financial assets out there. Does this mean there’s a Global Savings Glut? No: because there are equal and offsetting quantities of financial liabilities.

Should we call that a Global Liability Glut?

Net global money “savings” (financial assets minus financial liabilities) is always zero. If we’re talking about money savings, there can never be a Global Savings Glut. It’s an incoherent concept.

I’ll leave it to my readers to ponder what that means for the notion of “loanable funds” — a notion you’re invoking every time you use the term “Savings Glut.”

What we have instead of a Global Savings Glut is:

1. A Global Labor Glut: more human effort and ability available than is needed to provide goods that provide high aggregate marginal utility, and,

2. A global financial and political system that — despite the reality of #1 — fails to transform that abundance into maximum aggregate human utility via reasonable distribution of that abundance.

* Used to be, you had to give the lord of the manor one of your cows, or some of your corn, every year. When he issued money ex nihilo — probably to pay soldiers — and started accepting that credit instead for taxes, he sacrificed some of his claim on your cow. He exchanged one asset/credit/claim (for your cow/corn) for another (the solders’ services) .

Cross-posted at Asymptosis.