Savings, Debt and the Global Economy

By James Kwak

I’m warming up for a longish Beginners-style article on government debt, which will come out next week or so. In the meantime, the New York Times has an article today about China’s diminishing demand for U.S. dollar-denominated debt. Theoretically this could make it harder for the U.S. to borrow money and thereby push up the interest rates on our debt (now at extremely low levels).

China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.

However, the article doesn’t mention one compensating factor. The fall in China’s buildup of its foreign currency reserves is linked to the rise in the U.S. savings rate, which is projected to rise to as much as 6-10% (it was over 10% in the 1980s). Some of that new savings will go to pay down debt, but a lot will go into savings accounts, CDs, money market funds, and mutual funds - which means that depresses interest rates across the board. On the back of the envelope, 6% of personal income is about $600 billion a year in new domestic savings to compensate for reduced overseas investment. Whether this will be enough to compensate entirely I don’t know. But if we were all one global economy in the boom, we’re still one global economy in the bust.

Comments

[mike904:]

I think you have that backwards. The rise in savings was a result of the Chinese drop in debt demand. The Chinese don't have a "voracious demand" for US debt. The China trade is American manufacturers in China selling products produced by American companies and calling it "trade". That's labor rate arbitrage, not trade.

The Chinese aren't "buying bonds", they're exchanging cash for cash equivalents. The fact that Wall Street spent 7 years manufacturing cash equivalents is what made this "demand" appear.

The whole idea that central banks "invest" in government bonds is loonie. Governments NEVER pay their debts. Treasury bonds are just a debasing mechanism. Global free trade is lipstick on a tradewar pig.

Jan 08 02:33 PM

[Smarty_Pants:]

"Some of that new savings will go to pay down debt"

Well then, it's not really savings, is it? What's the actual rate of savings once personal debt re-payment is excluded?


"Theoretically [reduced Chinese demand for our debt] could make it harder for the U.S. to borrow money and thereby push up the interest rates on our debt (now at extremely low levels)."

Let's not get the cart before the horse. Maybe it's the incredibly irresponsible policies of the US Congress to borrow trillions and spend them on wasteful projects, often with adverse consequences, that is reducing the Chinese demand for our debt.

Or perhaps its the unavoidable conclusion that is rapidly becoming apparent, the US won't EVER make good on its debt which causes them to search for other places to park their excess reserves.

Whatever the reason, the eventual reluctance by the world at large to continue funding the spendthrift American political system is what will leave the USTreasury with bids for its debt few and far between until and unless rates are increased to attract sucke, ... errr ..., uh ..., investors.

Jan 08 03:51 PM

[Kevin Walmsley:]

The Chinese "demand" for treasuries was merely a recycling of the cash sent over to buy manufactured goods. It's a function of the capital account, by which any trade deficit is financed with a capital surplus, and vice versa. Americans for 30 years have been selling capital goods (bonds, stocks, real estate) in exchange for consumption.

Now, we've started to consume less. For the first time in decades, we're starting to spend less, and save more. Chinese demand for bonds isn't seeing a reduction in enthusiasm--it was never there in the first place. There's diminished demand, because the flow of American dollars to Beijing has stopped.

Don't forget, too, the promised Chinese stimulus of $600 billion. Where do you suppose the money is going to come from? Most logical choice is to sell off their enormous supply of American treasuries, at the exact time Obama is going to have a big fire sale on the same instruments. It'll be interesting to see bond yields soar, despite deflation.

Jan 08 05:03 PM

[CJJ:]

I like how people come on and comment on "when foreign countries realize what the US is doing they'll stop funding our debt"...Give me a break. Yes, no counties in the world have any idea what is going on, but thousands of people posting on the internet have it all figured out. Do you think it is that simple? Really?
The same people who cart out "free markets will cure all"...Well Free Markets have never existed and never will and it would be more apt to say markets return to the mean after grossly overshooting and they do it all slowly and irrationally...WHY you ask?
Because people are irrational. I can read 1000 articles or 1 million comments and everyone is an expert, everyone has the solutions. Except everyone has the solutions for a petri dish economy in a world of robots where everyone does what would be best for the economy.
Sorry it doesnt happen like that. Why are things bad right now? Because the people in debt have more debt than the people who have saved. One person, one corporation, one nation can go much higher into debt than into positive territory and debt grows on itself...
Also in the economy right now, no one wants to spend money. Sure 8-12% of people are out of work, but 88-92% ARE IN WORK. But because of the mania right now just about everyone is spending less and this makes things worse(human irrationality)...
To follow some doom and gloomers advice every company mide as well shut down because things are just too dire...Maybe the free markets will just close up shop and we can all eat grass and wait to die.

Jan 08 05:09 PM

[no longer care:]

I do recall reading warnings over a year ago when researching why I knew we were in a recession and being lied to about it, that China was coming to the conclusion it would be unable to continue purchasing US debt in the future.

AsiaNews and Bloomberg are both reporting that "US debt is approaching insolvency..." chaos to soon follow...

Now, I realize that the Pope is a notorious Doomer and thus, an unreliable economist at best, but "very short-term thinking" seems to be the common denominator.

www.asianews.it/index....

It's simple really, we have lost faith in such thinking.

Aftermath?

Jan 08 06:14 PM

[nmelendez:]

Nothing is going to happen. Inflation will take care of this problem. Buy any commodities and hold on for the ride. Best bet are copper, lithium and cobalt. Oh yes, uranium also. I am betting on gold. After the hedge fund sell off they are going to have to buy back replenished stock.

Jan 08 07:17 PM

[John Lounsbury:]

Smarty_Pants - - -

I think the author is looking at the balance sheet when he says: "Some of that new savings will go to pay down debt"

Anything that increases net worth can be called savings. That means that whether a dollar goes into savings (becomes an asset) or pays off debt (reduces liabilities), the net worth increases by $1.

Jan 08 11:35 PM

[bosun.j:]

Smarty, its your world the rest of us only live in it!


On Jan 08 03:51 PM Smarty_Pants wrote:

> "Some of that new savings will go to pay down debt"
>
> Well then, it's not really savings, is it? What's the actual rate
> of savings once personal debt re-payment is excluded?
>
>
> "Theoretically [reduced Chinese demand for our debt] could make it
> harder for the U.S. to borrow money and thereby push up the interest
> rates on our debt (now at extremely low levels)."
>
> Let's not get the cart before the horse. Maybe it's the incredibly
> irresponsible policies of the US Congress to borrow trillions and
> spend them on wasteful projects, often with adverse consequences,
> that is reducing the Chinese demand for our debt.
>
> Or perhaps its the unavoidable conclusion that is rapidly becoming
> apparent, the US won't EVER make good on its debt which causes them
> to search for other places to park their excess reserves.
>
> Whatever the reason, the eventual reluctance by the world at large
> to continue funding the spendthrift American political system is
> what will leave the USTreasury with bids for its debt few and far
> between until and unless rates are increased to attract sucke, ...
> errr ..., uh ..., investors.

Jan 09 03:43 AM