[OPE] Feeling flush: the savings ratio and idle funds

adsl675281@tiscali.nl

The NYT recently commented interestingly:

Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts. (...) The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor's 500-stock index has been steep. One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998. http://www.nytimes.com/2008/03/04/business/04cash.html?pagewanted=2&_r=1&hpe rational kernel in the "poor savings ratio" idea is just that US lifestyles (as well as in many other OECD countries) have grown more and more dependent on credit. If sufficient new income was generated to claim goods and services, credit would not be necessary. But because it isn't, and because credit makes a lot of money (mainly for lenders and large-scale investors), that just means that the ability to generate and sustain new income becomes very critical to the whole debt pyramid built on it - in claiming tomorrow's wealth today, everything depends on the longterm capacity to repay. It is just that nobody really knows when the limits of credit expansion are finally reached - it is difficult to find any valid formula for the sustainable proportions between new income and total credit volumes. You only find that out empirically when the whole thing starts to bust, and the ability to repay is exhausted in critical areas.

How then should we understand the "poor savings ratio" idea? US corporations are flush with cash, and secondly, US workers DO save a lot, except that the largest component of what they save is spent on their homes, rather than placed in stocks or savings deposits, so it doesn't count as "savings" but as "consumer expenditure". That kind of "saving" is now being eroded by falling home values, of course.

So anyway what you then have to explain I think is why there are such large hoards of basically idle funds sloshing around the economy. Some possible answers include:

- if real wages are stagnating or falling among the majority of workers and aggregate upward income mobility is reduced, then while this helps to raise the average rate of profit, mass consumption increases too slowly to warrant additional productive investment (even if existing capacity is at 81% or so, total output doesn't increase much at all).
- the returns for investing idle funds in financial products of all kinds, compares favourably with investing in expanding productive investments.
- the growing emphasis on quick, large shareholder profits runs counter to the longterm productive investments required for cumulative expansion which pay off only after some years.
- the enormous concentration of wealth, which exceeds the capacity to invest and manage it productively.
- considerations of risk, given the increasing uncertainty created by the market economy.

The ideological function of the endless refrain about the "poor savings ratio" is to blame workers' excessive consumption for the failures of capitalism, and it results directly from the simpleminded notion that there is a zero-sum trade-off between aggregate savings, consumption expenditure and investment, abstracting from the enormous differences in incomes, savings, consumption and assets between social classes.  In fact, James Poterba (1987) discovered once in the course of tax analysis that changes in US aggregate corporate saving were only partly offset (somewhere between 25% and 50%) by changes in aggregate household saving in the United States. 

That figures -  if you compared the amount of capital that would exist if the household savings ratio of ordinary workers increased a few percent, to the total amount of corporate savings existing nowadays, it just isn't very much. Whether or not workers save a few extra percent of their income, doesn't make much difference to the overall picture. But it is of course a nice ideological argument to say that the economic problems are all due to "excessive consumption", while foreign traders instead wring their hands about signs of any slowdown in US consumer expenditure.  It's often along the lines that workers should "tighten their belts" for the sake of national salvation (a la Stiglitz), but that is an argument which is less and less credible in these days of ruling class opulence. It makes no sense at all to people shoplifting at Wal-Mart because they cannot afford to buy.

The rational kernel in the "poor savings ratio" idea is just that US lifestyles (as well as in many other OECD countries) have grown more and more dependent on credit. If sufficient new income was generated to claim goods and services, credit would not be necessary. But because it isn't, and because credit makes a lot of money (mainly for lenders and large-scale investors), that just means that the ability to generate and sustain new income becomes very critical to the whole debt pyramid built on it - in claiming tomorrow's wealth today, everything depends on the longterm capacity to repay. It is just that nobody really knows when the limits of credit expansion are finally reached - it is difficult to find any valid formula for the sustainable proportions between new income and total credit volumes. You only find that out empirically when the whole thing starts to bust, and the ability to repay is exhausted in critical areas.

In other current news, the FT comments:

"There is a flight to cash and the build-up has been massive and unprecedented," said Peter Crane, publisher of the monthly Money Fund Intelligence newsletter. A series of Federal Reserve interest rate cuts since September has also prompted investors to move cash into money market funds, as the interest earned from these investments tends to lag the decline in the Fed funds rate. "When you get rate cuts stacked on each other, institutions ride the lag," said Mr Crane. Money market funds have a reputation for safety, because they promise to maintain the value of every dollar invested. The last day of February marked the end of the first quarter for some Wall Street investment banks, and they also appeared to be shifting into less risky assets in the Treasury and money markets. Treasury bills, the safest and most liquid short-term government debt instruments, have been in rampant demand, pushing implied yields on one-month Treasury bills to 2.08 per cent from 2.31 per cent in the space of a week. (...) Traders in the money markets are also displaying signs of fear. One key example can be seen in what is known as the TED spread - the difference between the three-month Treasury bill and three-month interbank lending rate, or Libor. It has grown to 120 basis points. http://www.ft.com/cms/s/0/d48da1e0-e87c-11dc-913a-0000779fd2ac.html?nclick_check=1

This all adds up to a conservative, angst-ridden capitalism - sort of like, an idling Porsche going vroommm, vroomm but actually going nowhere. No wonder people turn off from economics and turn to more interesting endeavours.

Jurriaan

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