I will discuss that chart in a bit, first let’s play a thought game.
Thought Game Conditions
• The Government pays a NYSE listed corporation a $1 trillion to build a bridge
• Money Supply rises by $1 trillion
• The expected life of the bridge is 30 years.
• Via increased economic activity and tax collection the government will collect $250 billion (the government will lose $750 billion).
• The builder pays employees $700 billion and records a $300 billion profit paid out as dividends.
• The employees spend $630 billion and save $70 billion.
• Assume interest is zero and there is no time preference or time value of money.
Q: What is the True Net Savings?
New Conditions
• The first day in service a terrorist blows up the bridge or an act of God destroys it.
• The bridge is worthless. Moreover there are now $100 billion in cleanup costs.
Q: What is the True Net Savings Now?
True Savings
From a personal point of view the dividend recipients saved $300 billion and the employees saved another $70 billion.
The dividend recipients made out like bandits but even more so did the corporate executives who undoubtedly got huge bonuses and stock options. Hooray!
But where did the money come from?
We have a redistribution not savings. Government took money from future taxpayers and wasted it on unproductive assets.
After the bridge collapses and is cleaned up, there is an additional $1.1 trillion sloshing around as M2 and alleged personal savings in the bank.
That is offset by $1.1 trillion in debt. The government created winners and losers, nothing was saved.
Total Credit Market Debt Owed
Total credit market debt owed is $85.9 trillion!
That number comes from the Fed.
How much of that can possibly be paid back?
Savings Glut?!
Former Fed chair Ben Bernanke says interest rates are so low because of Part 3: The Global Savings Glut.
… My conclusion was that a global excess of desired saving over desired investment, emanating in large part from China and other Asian emerging market economies and oil producers like Saudi Arabia, was a major reason for low global interest rates. I argued that the flow of global saving into the United States helped to explain the “conundrum” (to use Alan Greenspan’s term) of persistently low longer-term interest rates in the mid-2000’s while the Fed was raising short-term rates.
The idea is of course preposterous. Bernanke confuses monetary printing and financial speculation with saving.
What is Saving?
Saving = Production – Consumption
Here’s a classical example. A farmer producers 100 bushels of wheat. He eats 10 of them and saves 90. But wheat rots. So he sells those 90 bushels for dollars. Those dollars are now his saving.
Personal Savings
Take a look at the lead chart.
The three spikes are three rounds of Covid stimulus, the first under Trump and the second two spikes under Biden.
This money was handed out willy-nilly.
What was produced? The answer of course is nothing.
Negative Saving
If nothing was produced, there can be no saving. But most of that money has now been spent.
Ah, but what about the bill?
Yes, thanks to the handouts there are trillions of dollars of negative savings added to the US debt stockpile that someone has to pay back.
We spent (borrowed from the future) what we never produced. That is net negative saving.
This discussion does not imply the government should have stood back and done nothing at all, but the stimulus checks were not targeted and the third was total overkill, with consequences.
Consider Military Spending
The US spends hundreds of billions of dollars every year on military equipment.
At least the government (taxpayer) gets something, investment in bombs and military equipment.
Let’s consider another identity regarding savings.
Savings = Investment
Since Savings = Production – Consumption we can derive:
Investment = Production – Consumption
The government invested in bombs. When they are dropped the value of that investment is now zero. The bombs have been consumed, but the money and alleged saving is still sloshing around.
The same thing happens to military equipment. It becomes obsolete over time.
Wheat rots, equipment gets obsolete. Both are forms of consumption.
If the spending was truly for defense, we would get something for our money. Unfortunately, we unwisely use taxpayer money to be the world’s policeman.
And what about Vietnam, Syria, Iraq, Afghanistan?
That is totally unproductive debt that keeps piling up. And don’t forget interest on the debt.
There are winners and losers. The winners in this example are the politically connected, the banks, and the industrial-military complex.
Everyone else is a loser. Yet, out of this ridiculous mess, Bernanke proposes a “savings glut”.
What About GDP?
Let’s consider debt through the eyes of GDP with a spotlight on China and the developer Evergrande.
According to the New York Times, Evergrande has more than $300 billion in financial obligations, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. Things got so bad that the company paid its overdue bills with unfinished properties and asked employees to lend it money.
A few days ago Evergrande was ordered to tear down some of those buildings.
All of this activity added to GDP. Money spent tearing down the structures will add to GDP as well.
Is this ridiculous? Of course it is.
Realistically, not just because of Evergrande, Chinese GDP is way overstated. In practice however, the malinvestment will come at the expense of future GDP.
The same applies to the US.. And this is why it takes increasing amounts of money to goose GDP at all.
The law of diminishing returns has kicked in. The marginal impact of more debt decreases over time.
What About Inflation?
Those three rounds of stimulus in the US combined with QE forcing interest rates lower when they should have gone the other way produced a nasty bout of inflation.
Speculation is running rampant in stocks, houses, Bitcoin, NFTs, and even zombie companies via junk bonds.
A zombie company is one unable to cover debt servicing costs from current profits over an extended period. The Fed has kept them alive with low interest rates.
What is the True Net Savings in the US?
I have no idea. Nor does anyone else. But it is the sum of all the buildings, productive assets etc, not the alleged value of them in dollar terms at the moment.
The Fed has so distorted money supply and there is so much debt and financial speculation it is impossible to say what portion of total credit can actually be paid back (i.e. productive vs unproductive debt).
Once again, talk of a savings glut is absurd. We also know the Fed blew another massive bubble.
Financial Crisis Coming
In June of 2017, then Fed Chair Janet Yellen proclaimed I Don’t See a Financial Crisis Occurring ‘In Our Lifetimes’.
Even if we let the Covid pandemic slide as a non-crisis, these debt levels ensure another global financial crisis is coming.
Meanwhile, the Fed is trying to undo its damage with a hawkish FOMC meeting.
For discussion, please see The Bond Market Reacted to Hawkish Fed Meeting Minutes Days In Advance: Why?
Lots of words were spilled today in over the Fed’s allegedly hawkish FOMC meeting minutes. Let’s go over several things no one else seems to have caught.
It’s far too late for the Fed to stop the now inevitable crash. Yet, there still no way to time the event.
However, expect the outcome to be a deflationary crash not hyperinflation. That’s what happens when debt bubbles implode. And this is the biggest debt bubble in history.
Correction and Additions
One of my bright readers accurately pointed out my first example was redistribution from one set of taxpayers to another with no net savings, now corrected.
I also added discussion from another identity Savings = Investment with an example of military equipment.
Thanks for Tuning In!
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Mish
Money is
just the best way to get people to work. Another way is coercion. Yet another
is status. Savings on the other hand is a way for people to not have to work so
money and saving are exact opposites. If you don’t want people to work you give
them savings and if you do want them to work you take the savings away either
by confiscation or by inflation. Looking at present policy we can see that the
process is self-correcting. Having given people too much savings thus giving
them too much “not having to work” power and since people not working means no
production, these savings are now being destroyed through inflation because now
there are too few goods and services compared to savings. Eventually when enough savings has been destroyed
or confiscated people will have to go back to work which is by the way the
objective of any rational government. The Fed will do this by 1) allowing inflation
to run a bit devaluing savings then 2) raising interest rates which will eat up
remaining savings by causing the markets to decline. Excess savings will then
be sufficiently destroyed to force people back to work and work is the only true way to increase wealth for a nation. All others are illusion.
made in China, the impact also includes a massive wealth transfer out of
the USA.”