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Home Publications Blogs Beat the Press High Asset Prices, the Savings Glut, Secular Stagnation, and Unemployment

High Asset Prices, the Savings Glut, Secular Stagnation, and Unemployment

Tuesday, 08 July 2014 12:38

Neil Irwin has an interesting piece in the NYT noting how high prices for a wide variety of assets have driven returns down to historical low levels. He notes that this is a predictable outcome, and in fact an intended result, of the low interest rate policy being pursued by the Fed and other central banks.

The idea is that high asset prices make it cheap for firms to borrow to finance new investment. They also make it easier to buy a home and allow many people who had higher interest rate mortgages to refinance into lower cost ones, thereby freeing up money for other types of consumption. There is also a wealth effect whereby higher stock and house prices will translate into increased consumption. Through these channels central banks hope to provide some boost to growth.

However the flip side of this policy is that investors can anticipate lower returns on their savings, unless they want to hold exceptionally risky assets. This is the idea of there being a savings glut, or as Irwin suggests today, a shortage of adequate investment opportunities.

The idea of a savings glut is not new, Ben Bernanke first mentioned it back in 2004 when he was a member of the Board of Governors. However the implications were not fully drawn out by Bernanke at the time or by Irwin in today's piece. A savings glut implies an economy that is not producing at its capacity.

To cut through the nonsense, savings in an economic sense means not spending. From the standpoint of the economy, it is just as much savings if you put $1,000 in the stock market, a checking account in your bank, stuff it under your mattress, or burn it in your fireplace. Anything that does not involve the purchase of a newly produced good or service means saving. Saying that we have a saving glut means we have an economy that does not generate enough demand to keep the economy at full employment. This is of course the story of secular stagnation that folks like Larry Summers have recently discovered and the problem that some of us pre-mature secular stagnationists have raised for years.    

The idea that the economy could be subject to an ongoing problem of inadequate demand used to be grounds for eviction from the realm of serious economists. But anyone who is willing to look at the evidence with a straight face really can't escape this conclusion.


The nice thing about problems of inadequate demand is that in principle they can be easily remedied. It's not hard in principle to create more demand. The first route is to have the government spend more money. That creates demand -- the government pays people to do things. There are a long list of things that need to be done. Think of all those things that we think that we can't do because they cost so much, like stopping global warming, educating our kids properly, or providing care for seniors. It turns out that we actually can do them because we have more supply than demand. We need to spend in these areas to fill the gap. 

But, that ain't going to happen. Some people are scared to step on the cracks in the sidewalks and some people are scared of deficit spending. Unfortunately, the latter group of people are running the country.

Item number two on the creating demand list is reducing the trade deficit. This one is straight out of intro econ. Our annual trade deficit of $500 billion corresponds to money that is created demand elsewhere rather than in the United States. The tried and true path for reducing the trade deficit is getting the dollar down. A dollar that costs less in terms of foreign currency makes our exports cheaper for people living in other countries and makes imports more expensive for people in the United States. The result is more exports and fewer imports, in other words a lower trade deficit. Eliminating the trade deficit altogether would pretty much close our demand gap, increasing GDP by around $750 billion a year.

Getting the dollar down is not a mystery either. It has been held up by the deliberate actions of other countries (most importantly China) buying up huge amounts of dollar denominated assets to keep up the value of the dollar and preserve their export markets in the United States. The way to reverse this pattern is to negotiate, as was done with the Plaza Accord under President Reagan in the 1980s. As a result of that agreement, the dollar fell sharply and the trade deficit was cut by two-thirds.

This doesn't happen today because powerful interests like Walmart, which has low cost supply chains in the developing world, and General Electric, which has factories hiring low-cost labor in the developing world, don't want to see the dollar fall since it would eat into their profits. There are also powerful companies, like Microsoft and Merck, that have their own demands that they don't want subordinated to efforts to get to full employment. Therefore we see little movement towards a lowered value dollar.

If we can't increase demand, the other route to full employment is to reduce the length of the work year. This has been done with enormous success by Germany which has lowered its unemployment rate to 5.1 percent, from 7.8 percent at the start of the downturn, in spite of having no more rapid growth than the United States. The average work year in Germany has 20 percent fewer hours than in the United States. The reduction in hours means five weeks a year of vacation, or more, paid family leaves, and shorter workweeks, all of which sound much better than millions of people being unemployed. 

We could go this route in the United States. In fact, California, New Jersey, Connecticut, and Rhode Island have already gone the route of paid family leave. However, there is a reluctance of politicians to suggest that less work might actually be good. And economists are still hesitant to accept the reality that we do in fact have a problem of too much supply.

Anyhow, the notion of a savings glut is hugely important for how we think about the economy. As long as the world suffers from a savings glut, it is a world where scarcity is not an issue. We have the ability to produce more of most goods and services. The problem is how to increase demand, not allocating "scarce" resources.

Comments (18)Add Comment
corp profits
written by Jim, July 08, 2014 2:06
you referenced how the corporate profit share of corp value added in a previous post and obviously profits/gdp are a big part of the equation of future asset returns. why do you think the share is so elevated from historical norms and has been seemingly trending upwards for a decade? thanks in advance
On Germany and hours
written by Ironic, July 08, 2014 2:31
The introduction of the "minijobs" (inter alia) in Germany has doubtless brought down average annual hours per worker.

At the same time the number of workers with 35+ hours worked has increased since the mid-2000s from nearly 27m to nearly 29m in 2012 (OECD) and the total number of weekly hours worked in Germany is hitting multi-decade highs in 2013 (Eurostat).

To imply that the German experience shows "the other route to full employment is to reduce the length of the work year" is highly disingenuous. The increase in labour supply in Germany for low-income (and low-wage) workers has not been at the expense of others in work, quite the contrary.
The Point Is...
written by Larry Signor, July 08, 2014 2:59
As long as the world suffers from a savings glut, it is a world where scarcity is not an issue. We have the ability to produce more of most goods and services. The problem is how to increase demand, not allocating "scarce" resources.

The point is Not German Macro results, which Dean cites as a potential part of the full employment solution. This was not his main point...increased demand is the solution. The available mechanisms are constrained by politics and policy that is bought and paid for.
Kurzarbeit is Keynesian Stimulus
written by Amileoj, July 08, 2014 3:30
It's worth pointing out that the way Germany reduced the work week in response to the Great Recession was to subsidize part of the foregone wages of employees whose employers agreed to reduce their wages rather than laying them off.

It was a fair bargain: The employees got to keep their jobs and enjoy a bit more free time, without giving up most of the corresponding pay, and the employers go to avoid, in principle, future re-staffing costs.

But what it was not, was an alternative to solution #1 discussed above. It was a particular use of government spending (a rather effective one, because leveraged by the voluntary agreement to in effect 'share the work'). But is was still a Keynesian response, and worked well *because* it was (had it required a corresponding tax increase to offset it, it would have been much less effective).

So this is really not a 3rd approach to solving the problem. There are really only two. And only one of those is something we can do unilaterally, and without real cost (i.e., without 'losers').

Changing the trade balance, by contrast, would involve both getting the agreement of the Chinese (and others) and having someone bear the costs associated with the resulting deterioration in real terms of trade.

All of which makes it even more bizarre that the one costless and absolutely certain solution we have available to us, is the one that is effectively off-the-table in our public discourse. It's acceptable to at least talk, albeit ineffectually and incoherently, about wanting to export more and import less.

But talking about wanting to run bigger deficits is beyond the pale--the supposed danger of this course is virtually an unquestioned assumption by the overwhelming majority of commentators and politicians and (hence) of the public as well. This is core of our economic malaise: the conventional wisdom regards the one sensible course of action, to be anathema.
I like this idea of shortening the work year
written by Dave, July 08, 2014 3:36
It could be done on a voluntary basis in theory, but that might not work. If it was voluntary, it would probably used by employers as a way to measure dedication, just because it is a number, and they'd probably retaliate against such employees that don't show 'full dedication'.

So it really has to be done on a mandatory basis, I think. Regrettably, it might not affect many salaried jobs that much, because 40 is seen as a minimum, not a maximum.
Wouldn't a negative interest rate help?
written by Dave, July 08, 2014 3:51
If we reformed the monetary and banking system, I think a negative interest rate could be imposed on savings. It would take some other controls (laws) to preventing the money from escaping, but it seems feasible.
written by Larry Signor, July 08, 2014 5:01
...savings in an economic sense means not spending. From the standpoint of the economy, it is just as much savings if you put $1,000 in the stock market, a checking account in your bank, stuff it under your mattress, or burn it in your fireplace. Anything that does not involve the purchase of a newly produced good
or service means saving.

How do we impose a "negative interest rate", and with such disparate forms of saving, would it do any good?
written by skeptonomist, July 08, 2014 5:02
The problem is not that there is a "savings glut" - working people have been able to save little and have had to go into debt because their real wages crashed in the 70's and have not increased much since. The problem with the economy is that the wrong people have the money - rich people and corporations have plenty and are not investing constructively. Why should they when there is little demand for products? And demand is low because working people don't have the money or are unemployed.

One problem with economists is that many of them think of money in the aggregate, not in terms of its distribution. Their solution to a recession is to try to pump money into the economy through the standard central-bank actions. But this works - or is supposed to - mostly on the supply side. Low interest rates are not going to entice corporations to invest now - they already have plenty of money. Yes, the key is "demand, demand and demand" (as Dean says), not interest rates or inflation. (Interest rates can work on the demand side through housing, but promoting housing didn't turn out very well in the last cycle did it?).
Excellent article!
written by Edward Lambert, July 08, 2014 5:37
Economists are coming to understand what effective demand is and how it can keep the economy from reaching full employment. Keynes told us about this.
Recent publishable spinners for spending are still as specious as ever.
written by jaaaaayceeeee, July 08, 2014 6:24

Only your sophisticated secular stagnationists ignore full employment policy, while they propose ever more taxpayer subsidization of risk, rents, profits, and structure markets to be ever less competitive.

I haven't seen, for example, Larry Summers recommend anything to stop and prevent secular stagnation. How is his contention, that we need to increase infrastructure spending, add up to anything more than hand waving?

If Dean Baker is a premature secular stagnationist, Larry Summers is the predator's specular creationist.

Here's Summers' latest op-ed, in the Washington Post, demanding that USA policy makers impose democratic capitalism world wide, but in the form of obviously anti-democratic trade pacts, and more conditional offers of what he calls generous economic assistance to improve economic growth and hope. Unfortunately Summers's offers while in his Clinton, IMF, and Obama eras, had no goals like supporting full employment, raising wages, improving the value of the dollar, or increasing demand in the USA.

written by djb, July 08, 2014 6:35
if we could get past walmart, we could make it the law that if another country doesn't allow us to buy their currency valued assets, then they cant buy ours
internal transfer versus trade deficit
written by Peter K., July 09, 2014 9:14
Coppola and Piketty


"German, Japanese and - above all - Chinese lending to the US is the so-called "savings glut" that is widely blamed for creating the financial instability that led to the financial crisis. But Piketty argues that this source of capital is tiny compared to that generated by rising inequality WITHIN the US (my emphasis):

"...this internal transfer between social groups (on the order of fifteen points of USnational income) is nearly four times larger than the impressive trade deficit the United States ran in the 2000s (of the order of four points of national income). The comparison is interesting because the enormous trade deficit, which has its counterpart in Chinese, Japanese, and German trade surpluses, has often been described as one of the key contributors to the “global imbalances” that destabilized the US and global financial system in the years leading up to the crisis of 2008. That is quite possible, but it is important to be aware of the fact that the United States’ internal imbalances are four times larger than its global imbalances."

So the total amount of capital available for investment in the US at this time was far larger than the imported "savings glut" caused by its trade deficit. And because the US was importing capital, all of that capital had to be invested WITHIN the US***. As I've noted already, the corporate sector was (and is) running a structural surplus. That leaves the household sector and the government sector to absorb the capital. No wonder lenders aggressively targeted those households most in need of money. They had to put that capital somewhere****, and poor households were both the easiest to lend to (because they needed the money) and gave the best returns (because they were the highest risk). Financial innovation enabled far more of this capital than usual to find its way to poorer households: the concentration of risk that would normally have limited individual lenders' exposure to poorer quality borrowers was dispersed across the globe through securitisation and amplified with derivatives."
Most of the upward redistribution was consumed
written by Dean, July 09, 2014 9:58

I don't recall Piketty's account on this, but if he compared the trade deficit to the upward redistribution then he is seriously wrong. The trade deficit is dollar for dollar a drain on demand. By contrast, the rich's propensity to consume is undoubtedly lower than it is for the poor and middle class, but it is very far from zero.

To throw some rough numbers out there, let's say the propensity for the middle class and poor is 0.9, whereas for the upper-middle class and rich, it is 0.6. That makes a difference of 0.3 percent of the 12 pp of income shifted upwards. That gets you 3.6 percent of income, which is about 3 percent of GDP. That's a number comparable to the size of the current trade deficit, half of the size of the 2005 trade deficit.
written by Harlan Green, July 09, 2014 10:02
Should we have higher inflation target rate to spike demand, such as 3%?? http://populareconomicsweekly....ation.html
written by Rob Parenteau, July 09, 2014 10:30
Introductory economics students are taught in any accounting period, total saving equals total investment. To hold the view that the problem of secular stagnation has something to do with a "saving glut" implies there must be, at the same time, a corresponding "investment glut". Patently, there is no such thing. There is, instead, an investment dearth, at least across the advanced economies. And oddly enough, the investment dearth is even visible in places like the US, where costs of finance capital are at historical lows, and profit shares are at historical highs. Perhaps the introduction of incentive structures that encourage managers to line their pockets and the pockets of shareholders back in the '80 under the misleading rubric of "maximizing shareholder value" has proven to be a rather treacherous scam. Note, in particular, that the US non financial corporate sector is no longer deleveraging. It is dramatically adding debt, not to fund increases in tangible productive investments, but to artificially boost earnings per share measures and share prices. Even the bankers are starting to complain about this (though they still make the loans to feed it). There is no saving glut in the advanced economies. There is an investment dearth, which in a stretch might be called a corporate savings glut. And the models of economic growth used by most economists, mainstream and heterodox, require investment for there to be any growth. Savings, as Keynes argued a lifetime ago, will in turn be the outcome of investment and income expansion.
Double-check that German labor hype.
written by Benedict@Large, July 09, 2014 12:48
There's a lot of hype going around about what a wonderful place Germany is to work. This hype never mentions things like "one Euro jobs", the massive "labor liberalization" there known as the Hartz Reforms, or the hard bias against immigration. Neither do those hyping Germany ever bother to explain how one of the most conservative governments in Europe enacts what appear to be some of the most liberal labor laws.

And that $65/hour for auto manufacturing jobs? Ever try to actually track that back? Good luck. [It's actually an unsourced figure from a Forbes article.]

If Germany sounds too good to be true, there's a reason. It is.
BLS says German manufacturing workers have average comp of $47 an hour
written by Dean, July 09, 2014 1:32
That was in 2011 [http://www.bls.gov/news.release/ichcc.t01.htm], it would be roughly $50 an hour in today's dollars. With that as an average, it certainly seems plausible that autoworkers would get $67. After all, someone has to be above average.
written by liberal, July 11, 2014 8:45
Rob Parenteau wrote,
It is dramatically adding debt, not to fund increases in tangible productive investments, but to artificially boost earnings per share measures and share prices.

IMHO this aspect of the stock market performance is underreported. I think that the declining share of labor in national income is a contributing factor, but the business of adding debt surely must be very important too.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.