Debt and Occupy Wall Steet

I liked this essay's explanation of the zeitgeist behind the Occupy movements.

I think there is a simpler story though to be told about modern economic growth being driven primarily by increased private debt levels.  (Update: my view expressed here is heavily influenced by Steve Keen's writing.)  It is less malevolent than the corruption of politics by money explained by the linked essay and simpler to address.  

My story would be that constantly increasing debt levels of the past 3 decades created false demand that was unsustainable when the debt growth stopped.  The extra demand smoothed out the business cycle while the debt grew creating a self fulfilling "great moderation" of stable dependable economic growth that allowed and incentivising high debt levels.

High debt levels benefit asset owners by driving up prices and lenders by increasing interest payments which also explains the shifts in wealth distribution.  There was also a kicker to the wealth concentration at the end of the debt build up where "the 99%" were convinced to take on large debt loads to purchase houses which, as an un-productive asset, require either the owners salary or price appreciation to enable the interest payments.

Recognising the current imbalances as a debt problem would add "eliminating tax incentives for debt funding" and possibly   add "managing the aggregate debt level" to the responsibilities of the world's central banks.  

I don't think this is a difficult narrative for people to understand and I imagine most are aware of the increased presence of debt in their lives.  While discussion of the government debt level is a popular media topic and the level of education loans is starting to make headlines there is much less discussion of the overall private debt level making me think that the majority of people are still looking for a return to the good old days of steady debt growth.

Savings Glut or Investment Dearth?

I have been waiting patiently for Billmon at Whiskey Bar to post his 3rd entry on this issue. His first 2 pieces (Part I and Part II) were excellent and I highly recommend them to anyone who did not run across them already.

You'll probably want to read Nouriel Roubini's latest piece first as it is referred to at several points. It also provides context for the savings debate within a bigger economic picture.

Here is a taste of what Billmon says:

Instead, the problem appears to be a variation on the same theme Keynes explored 70 years ago: Private individuals with savings to lend are holding out for a higher price (interest rate) than borrowers are willing to pay - and in America's case, probably higher than it could afford to pay, given the quantity demanded.

By afford, I don't mean America is literally too poor to cover the vig, but rather that the interest rate required to finance the current account deficit solely from private sources would slow the U.S. economy and short circuit the current investment recovery - thus drastically reducing, if not eliminating, the demand for foreign savings.

This state of affairs has forced the ODIC governments to step into the breach and provide the financing that private lenders are no longer willing to offer. In effect, they are forcing the savings-investment market to clear - at an artificially low price. We can assume they are not doing this out of the goodness of their hearts or because of the kindness of strangers. They are propping up the market because they, too, are afraid of the deflationary wolf and so far haven't figured out another way to generate the kind of growth rates they need to stay one step ahead of it.

What makes all this such an interesting variation on the old Keynesian theme is that the recalcitrant lenders and the increasingly strapped borrowers happen to live in different countries with different currencies and different central banks - as well as different cultures, ideologies and geopolitical objectives, some of which may not be reconcilable.

I will probably be back when the series raps up with some thoughts. Until then I am keeping an open mind. This issue is extremely important though and perhaps even urgent. It seems like the next 6 months will see a short-term test of the "savings glut" thesis (a liquidity crisis). How that test works out just depends on where the long-term equilibrium actually is.

Are U.S. Savings Rates Really Too Low?

This WSJ clip, flagged by Stephen Kirchner, takes a look at how much better U.S. savings look based on wealth increases rather than the portion of income being set aside. I do not have a subscription and did not read Malpass's piece in full but wanted to comment anyway.

Bear Sterns chief economist David Malpass rubbishes the notion that the US does not save enough:
Not only are we not running out of household savings, it is growing fast both in terms of the annual additions and the cumulative buildup of American-owned savings. Household net worth, one good measure of savings, reached $48.5 trillion in 2004. Time deposits and savings accounts alone total a staggering $4.3 trillion, versus slow-growing credit-card debt of $800 billion. True, the U.S. is the world's biggest debtor, but it is building assets faster than debt. Even if household assets took a hard fall, the remaining net worth would still dwarf other countries'. On a per capita basis, counting mortgages but not houses, net financial assets total $89,800 in the U.S. versus $76,900 in No. 2 saver, Japan. Of course, some households don't have nearly this average, creating risks for them and burdens on others in the event of a downturn. This is an appropriate policy concern, but the macroeconomic issue is aggregate savings, of which the U.S. has an abundance.
According to the Federal Reserve's flow of funds data, the 2004 additions to household financial assets were a net $590 billion. This was 6.8% of personal disposable income, providing a meaningful measure of the cash flow going into new financial savings. This increased the household's financial net worth to $26.1 trillion, way above any other country's savings and plenty to fund profitable domestic investments. If the 2004 appreciation in the value of homes and equities were also counted, the 2004 saving rate was 46% of disposable income. Foreign savings invested in the U.S., the counterpart of the widely criticized current account deficit, is additive to our own large store of savings.
....

Meanwhile, foreigners are actually losing ownership share in the U.S. despite the $2.6 trillion net debtor position, since U.S. assets are growing faster than foreign savings in the U.S.

A couple of gut reactions that I have are, man if homes and equities give back 2004's gains that is going to be one interesting experiment in wealth's effect on consumption. And,"losing ownership share" sounds an awful lot like selling.

Brad Setser commented on U.S. borrowing and foreign investor disinterest in U.S. equities a while back.

In broad terms, roughly $890 billion in net external debt issuance by the US financed the $666 billion current account deficit, $170 billion in equity outflows, and $57 billion in net outflows from banks and non-bank financial firms.

Bill Gross provided the chart below in his Investment Outlook near the end of February.



Posted by Hello
It shows the shrinking share of U.S. treasury stock owned by U.S. private investors. Rightly or wrongly U.S. investors are focusing on carry trades to generate wealth. Malpass sees this as a good idea while I have my reservations.

Malpass has a valid point that perhaps the imbalances of the world represent an excess of savings relative to investment opportunities. U.S. interest rates have been set by the Fed and reinforced by the purchase of foreign central banks. Neither of these represents a market process so my concern is eventually markets will set base rates higher and turn carry trades into losers. The world economies dependence on U.S. consumption just heightens the risks if U.S. investors have taken on too much risk at the wrong time.