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What makes us save more?
There is debate (and confusion) over whether the average American has actually increased his saving rate or whether this is a mirage. Ha!... Felix Salmon points out that some economists actually think that buying stocks and bonds is consumption - not saving. Much of the confusion arises from the need to distinguish between "investors" and "savers". There is a legitimate need for theory to take into account the possibility that the investor and the saver are not the same person, but some then go on to describe investors as "wealthy" and savers as non-wealthy, as if this is the chief issue. If a saver puts his savings in any other financial instrument besides cash, has he become an investor as well as a saver? Do only "rich" savers buy bonds, while non-rich savers put their savings in their mattress?
In my doctoral program, I took a class called "Capital Formation". It was all about understanding how and why real productive capital assets were created. Investing is a real phenomena. That is, we should think of investment as increasing the supply of physically productive capital in the world. When a saver buys a bond, that does not necessarily mean that the total supply of real capital has grown. In fact there's no reason to expect that it has. It's really another issue. The difference between the supply of financial assets in the world and the supply of real income producing capital in the world can be vast. More on real investment in another post.
For now, let's get back to saving... Typically, freshman economics texts suggest that higher interest rates (i.e. higher returns on bonds and stocks) encourage people to buy those financial instruments and, thus, save more. This "income effect" is accepted wisdom, but does it cover all the bases? Answer: only partly. The Theory of Consumer Choice says we have to consider the effect of higher interest rates on wealth too. The wealth effect is opposite in direction from the income effect, so that as Greg Mankiw says in his Principles of Economics text, "Unfortunately, research has not led to a consensus about how interest rates affect saving".
OK...so when the Federal Reserve reduces the interest rate it charges member banks ostensibly to "stimulate the economy", what does that do to consumer saving? Answer: WE DON'T KNOW! A saver might have a goal that involves saving each year for 20 years to be able to retire and live on (say) $50,000 per year after that. With now near-zero interest rates available, that saver now needs to save more to achieve his goal, than previously. And this ignores the increased amount of precautionary saving needed to offset the recent rise in general uncertainty about potential job losses, etc. Has the saving rate risen lately? The government says it has, at least in aggregate. But even if it hasn't, we can surely see why people might want to save more.
View the original article at:
http://www.swampreport.com/economy/what-makes-us-save-more/
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I like to begin with thinking that all savings is just future consumption. The government's attempt to interfere with a natural rate of interest (if in when they set the rate lower than it should be) is simply pulling forward that future consumption in the present. The Cash for Clunkers is a good example -- go try test driving a car at most dealerships right now. They'll tell you they're cleaned out and that more inventory won't be arriving for another 5-6 weeks. 6-7 weeks of sales of new vehicles were pulled forward into 2-3 weeks.
Interesting post. I'm relatively young, and a grad student, so don't have a very high income, by US standards. None the less, in the last year I decided to start saving in earnest.
My solution: buying silver. I was always bad with money; I tended to spend the FRNs as I got them. I have found, for psychological reasons, that saving silver (or gold) does it for me. You can't really spend them easily, so you just accumulate them. Some thoughts:
-Saving is fundamentally different from investing. When you save (i.e. accumulate) something, be it chestnuts or wheat or silver, you take it out of circulation, and conserve it for another day. Investing is exactly the opposite: you're putting your "stuff" into circulation so that it might be used and become productive. Metals make good savings vehicles because they don't go bad.
-Money placed in a bank is loaned out to other people. It is invested indirectly. Thus, in a macro sense, it is not a form a savings.
-FRNs are not savings vehicles. They are credits. Even if you stuff them in your mattress, you've still, in one way or another, lent *something* out so *someone* else. What makes them even more useless as a savings vehicle is that their issuer (the Fed) keeps creating more and more of them.
Savings in the modern world is very rare indeed. They are the *physical* accumulation of the fruits of your (or someone else's) labor; they are not an abstract entry on a ledger. This has become possible because of the huge and reliable productivity of our society, itself driven by the extraction of fossil fuels. We do not really need to save to ensure our biological survival. In a very real sense, we've been spending the Earth's savings, the results of millions of years of photosynthesis.
We're now beginning to learn, as a society, the real meaning of saving.
So if I put money in a CD for potential future use to pay for basic living expenses if I should lose my job, that is not saving. But if I put my money in a CD for no apparent reason then I am saving.
Did I get that right?
If I put my money in an employer retirement plan that is saving but, if I put my money in the stock market that is not saving.
Am I just confused?
Please answer only yes or no if you choose to comment.
Yes and no.
it was either the austrians or fekete who made the point that interest is the intermediary between wealth and income...as interest rates rise wealth holders are more inclined to lend for income...otherwise they would withold it in favor of hoarding becasue risk was not properly compensated at low rates....
people and economists fail to understand that interest rates must balance the interests of both savers and spenders or income seekers....most people who are debt slaves see only the debt side and as such are always hoping to achieve low interest rates....when they fall below market mediated rates they distort savings and spending decisions....
i have written often that low interest rates militate against capital formation....who wants to loan at paltry rates? and with rates so low, people take on riskier investment profiles elsewhere to obtain realistic returns - in fact the whole fire economy is built upon distorted price matrices....and then desperation is created so that investors buy into fraudulent schemes....
artificially low interest rates are a disaster....this is just one reason why i am a strong opponent of central banking....no cartel can know where the market should be...the soviets demonstrated quite well that central planning fails....
if currencies can float so should interest rates...
anyone remember the tv interviews of people that were using beanie babies as savings vehicles? they actually thought that these things were some sort of store of value.
The law of marginal utility. Utility, relevance for the removal of uneasiness.
Paul Volcker, Stanford, Feb 11, 2005
A few selected excerpts:
"Altogether, the circumstances seem as dangerous and intractable as I can remember."
"Boomers are spending like there is no tomorrow."
"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."
"What I'm really talking about boils down to the oldest lesson of financial policy in Central Banking: A strong sense of monetary and fiscal discipline."
Economic history is a long road of governmental policies that failed because they were designed with a disregard for the laws of economics.
Either unmask the logical errors in the chain which produced it or acknowledge there validity. To me this is Law and Contract.
Locust mentality at the generational level to which is the locust harvest of interventionism. Interventionism aims at confiscation of the surplus of one part of the population and giving to the other part.
Crisis needed for the asserted supremacy of social organization and economic policies. As for my savings what is at the tip of the pyramid? I am currently at Governmental Treasury Notes and Tax Free Investments on my way to minerals since we see there bent of mind moving to annihilation of law and contract. In the long run there cannot be any such thing as a unpopular system of government.
http://www.heritage.org/Research/Budget/upload/wm_2595.pdf
I save regularly. 10% of gross income. I also invest regularly - 6% of gross.
Interest rates, as far as savings is concerned, is not what drives me to save. It is the assumption that I will need my savings for 2 things - emergencies or retirement/unemployment. It is better to prepare yourself than hope for a government to help you out....even if that help is available, your own prep work makes the down times easier.
It goes back to the ant and the grasshopper. We're now in a world where the twisted story of the grasshopper taking your house and destroying it, taking your wealth and wasting it, is nearly here. In fact, it could happen in my lifetime with the current administration.
That said, I will continue on my merry way and ignore interest rates when it comes to savings. The only thing I look at it for is when it's time to do loans (mortgages, etc.).
Savings should be a standard function of everyone's life and interest rates should be derived from that standard function. Interest rates should NOT be a used for social engineering.
Good post, well said. I likewise save 15% of GI from salary, plus almost all bonus money (and no, I don't work for a Wall St. bank!).
For the said reasons, having a solid amount of cash in the bank and no debt allows massive flexibility, greater buying power in a deflationary depression like we are experiencing, and the ability to simply f*ck off to your favorite third-world country should for as long as you want (except for Ben's Banana Republic) your job go the way of the Dodo.
OK - I'm new at this. How do I post a chart?
Correlation prior to 1999 = .46
Correlation after 1999 = -.39
You're touching on an important point, that is: Interest rates ought to be a function of the free market by which its participants can make decisions about their own consumption, savings, and investments. And by which those that offer rates, are offering on the very same basis.
The fact that the Fed really doesn't how interest rates affects savings, is alluding that that point. Interest rates do a lot more than force people to save or spend, they are the gauges by which society can make rational decisions. The fact that Bernanke is establishing rates on his whimsical biases only reinforces more problems in the future.
Looking forward to the next post on "real investment."