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.
Sorry but I never heard about a Global Savingsglut.
But a chinese one exists which consists of the difference
between aggregate inflow of dollars(exports) subtracted
by the outflow of dollars(imports). This is the reserves of
dollars from the external balance of payments regarding
net-exports from China. If the chinese sells more in dollars
than they buy the “difference”(capital/labor/profits) will increase their (i.e)dollarreserves. The dollar-rate is set by the BoC, not direct by the market. Yuan is pegged to the dollar. The dollar-reserves have their corresponding liability of yuan in the balance-sheet of BoC.
This mercantilistic accumulation of foreign reserves represents
a surplus that is a mirror of other countries deficits. A savingsglut indeed that helped the US to engage in2 wars on recycled chinese credit paid for by the consumtion of the american people, This “missallocation” of capital(wars) have now forced the US FED to print approx. the same amount of money (a few trillion dollars) as excess-reserves to bolster further credit-consumtion and hold down interest-rates.
But the american house-bust was financed with mainly european
bankwholesale-money and ditto american repo-rehypothecated power-money. (IMF Borio)
The Sectoral Balance Approach by W Godley is always a good reminder how bookkeeping explains the reality.
Many thanks for a one of the best blogs
Thank you for a very good blog,
Your explanation, while true in accounting terms, does nothing to help us understand what is happening. The question is: Who has the glut and who has the debt? Of course, they balance!
But is the present distribution dangerous? Are the savings concentrated in a few hands? or a few countries?
I am reminded of a similar silliness when people talk about massive on-going U.S. trade deficit as no cause for worry. After all, all exports and imports balance! Talk about another terribly non-informative identity.
The question is: How long can the U.S. run 37-year continuous trade deficit, especially considering the enormity of the U.S. trade deficit this century. But no worry: Ricardian silliness postulates that we will find our niche.
Identities are fun and amusing, I guess–and bewitching for those who can barely think past their toes. Just hope these dimly lit brains never run a business.
I always considered the global savings glut to be the concentration of wealth (measured in terms of their ability to command goods and services) in the hands of people highly inclined to save, rather than spend their resources. Before 1980, this increasing concentration was countered by a tax and spend government policy which forcibly pumped money back into circulation, but since then there has been way too much savings in the sense of not spending. The money has instead turned into rising financial asset prices and a correspondingly lower return on investment.
If you had an economy with no mechanism for saving, everyone’s income would match outlays. The economy could continue like that indefinitely, basically stable save for variations in population and available resources. Once savings become possible, money can be withdrawn from circulation. Do the accounting. Over the years, the economy will shrink, unless the saved goods are spent. This is how savings gluts come about. (Spending on capital goods is just spending for the purposes of cash flow. Don’t confuse saving and investing, as the latter is actually just spending.)
I interpret the phrase, “savings glut”, differently. To me it means that there is not enough money in circulation.
For instance, if I take out a loan from a bank, the bank creates money. If I pay it off (saving), money is destroyed. Too much saving means not enough money.
Stormy has it right. Some people have a glut of savings and there are not enough profitable enterprises to invest all the savings into. So the savings churn around in the financial economy and never get spent or invested into the real economy where the debtors earn their incomes. Other people have an equal debt glut, and there are not enough investors hiring people and paying them incomes to get the savings back into the hands of the debtors so they can repay their debts. It’s not a question of netting out assets against liabilities. It’s a question of distribution of assets and liabilities. If one guy has all the money, and another guy has all the debt, and the only way the debtor can get money to pay his debt is if the guy with the money spends, invests or lends it to the debtor, but he doesn’t want to do any of those things and prefers to “save” his money, is it “incoherent” to say that the guy with all the money has a savings glut, even though “in the system” the money and the debt net out to zero? The economy doesn’t work unless money is changing hands in exchange for work or goods. If savers have too much of an economy’s total money, and spenders/investors have too much of the economy’s debt, the economy will stall for lack of circulation of the money.