Expect a Decline in Global Saving and Investment

The September edition of the Reserve Bank of Australia’s “Reserve Bank Bulletin” has an excellent article titled “Patterns and Trends in Global Saving and Investment Ratios”. The article compares saving and investment ratios of different countries and regions and their impact on the current deficits.

In this post, let me present some of the key points from the article. Saving and investment ratios tend to vary across regions and countries. Traditionally Asian countries have had high saving ratios. In recent times, the investment ratios of Asian countries is also tending higher as shown in the graph below.

China and India are among the top savers in the world. India’s saving accounts for over 35% of GDP. For China, it is close to 60%. Developed countries have low saving ratios. The United States has the lowest saving ratio in the developed world. In addition to high Saving ratio, the Chinese have high investment ratio as well.

In Asia, saving ratios traditionally exceeded investment ratios producing a large current account surplus. China has run a current account surplus since 2000. Oil exporting countries in the Middle East and Russia also have current account surplus. These countries supply their global saving to developed countries. The advanced economies historically have run current account deficits. Since the early 90s, the current account deficit has increased sharply in US.

On the development in saving and investment ratios in the U.S., the article noted:

As noted, the current account deficit in the United States widened sharply between the late 1990s and mid 2000s as the saving ratio fell – with a large decline in public saving in particular – while its investment ratio was boosted by a rise in housing construction. But since the mid 2000s, the US investment and saving ratios have changed by a broadly similar magnitude, and hence the US current account has been comparatively steady.

This analysis is absolutely correct since residential construction was one of the major drivers of the US economy until a few years ago. Large and small banks handed out loans liberally for investment purposes in the real estate sector. While that strategy boosted profits in the short run and increased the investment ratio for a few years, the negative effects of that reckless lending is being felt on a daily basis in the US. For example, the total number of failed banks has risen to 94 as of last Friday.

The effect of rise in construction spending leading to high investment ratio is evident in Spain as well as the chart below shows. The chart also shows that since the 1990s Germany has had a high saving ratio but low investment ratio.

The article concludes that declining domestic demand and tight financial conditions will lead to a sharp fall in investment in the U.S. Globally the economic downturn is projected to lead to a decline in saving and investment ratios in major countries and regions.

Comments

[ksmithdc]

The U.S. housing market will eventually rebound. I see no reason to extrapolate doom & gloom based on speculation.

2009 Sep 23 09:10 AM

[TeresaE]

US corporations (and our government) have used the profits (or stolen money) from the US citizens to invest with foreign countries and not at home.

The greatest fallacy of the "global" economy is that is will be good for the common American. It isn't. It has gutted our standard of living and only liar loans and the housing bubble could hide it.

Now, the irony of these decisions will show.

We, the unimportant, overpaid, American middle class were the giant corporations best customers. And our goverrnments' best taxpayers.

We have been intentionally decimated on the alter of (temporary) big profits and tax revenues.

Look around, other than government and zombie banks, there isn't much left in the US. And once foreign countries quit buying the government's bonds and BS, this Ponzi scheme will explode.

And we have nothing to save ourselves with.

Contrary to the ideology that so many, that stand to lose so much, think.

2009 Sep 23 07:11 PM

[doubleguns]

A MESSAGE TO THE SHEEPLEAs a nation we are being harvested for the good of the world order (jobs sent off shore) . If we do not wake up and reform our corrupt govt. we will wake up to find a barren parched ground with no seeds, no fertilizer and no water to replant our crops (no savings). The dust bowl is upon us and we had better get a grip on that fact. The foreclosures of the people are only a precursor to the foreclosures that will befall our country. (bond sale failures)

While the sheeple consume the seeds of future opportunities (govt givaways) we stand powerless to do anything but attempt to awaken and alert the masses. It seems futile at best but the alternative is failure of everything we have ever known, or held dear.

Wake up America, we are in trouble and your ignorance, SHEEPLE, is part of the problem. Our corrupt Washington is selling you out. We (concerned citizens) are the ant, you (sheeple) are the grasshopper.

The rich, elite and politically connected will not suffer. The middle class will be the sacrificial lamb upon the alter (taxes) . Their blood will be delivered to the masses to appease you sheeple (social programs) whilst Rome burns. Bread and circuses all around.Eat, drink and be merry you fools. Tomorrow you will be harvested (taxed to hell) and don't look so suprised or cry about it. Your ignorance has delivered you here. It is your own sheeple mentality that has delivered you on to this road to hell, no skills, no education, no jobs, no savings, no future.Frankly you lazy bastards deserve it. The rest of us do not. Unfortunately you threw away the only thing that could have made a difference.Your vote.

2009 Sep 23 08:25 PM