Peter Warburton – December 3, 2020
According to Gavyn Davies, chairman of Fulcrum Asset Management and distinguished Keynesian commentator, writing in the FT: “The forces of secular stagnation have created a further excess of global savings over investment, reducing equilibrium real interest rates and inflation.” Leaving to one side the contentious references to secular stagnation and a pre-existing global savings glut, this assertion cannot go unchallenged: while household saving soared in the second quarter, this has been more than offset by public sector dis-saving. National saving rates have tumbled in 2020, as they did in 2009. There is no excess of global savings.
Contrary to popular opinion, the surge in government spending in 2020 has very little in common with Keynesian counter-cyclical pump priming. The state has stepped in, not because the private sector would not spend, but because the private sector could not spend. Through job retention schemes and other support programmes, government has bought the regulatory compliance of the public, not their labour. Government has not primed the pump; it has thrown a spanner in the works. The attempt to characterise the Covid-19 slump as a Keynesian deficiency of demand just won’t wash. Alongside the inevitable demand shock, lockdown induced a massive negative supply shock that nullifies the output gap argument. There is an old saying: to a hammer, every problem is a nail.
For many years, we have advanced an alternative to the “excess global saving” explanation of falling nominal interest rates, summarised as the Leveraged Moral Hazard (LMH) hypothesis. The argument runs as follows: low interest rates are a catalyst of increasing private sector leverage, especially financial sector leverage. Rising financial leverage – whether by the banks, the non-banks, or both together – inflates financial asset prices while leaving consumer prices largely unaffected. Central banks, whose mandates require them to pursue a nominal consumer price inflation target, sense that they should be tightening, on financial stability grounds, but lack the courage of their convictions. When the fragility of the financial system manifests in crisis, central banks’ instinct is to lower interest rates to relieve pressure on leveraged balance sheets. Knowing the shape of the central bank reaction function, the financial sector readily accumulates further leverage. Falling nominal interest rates are a by-product of the capture of monetary policy by the financial sector. The global savings glut is a tired Keynesian myth.
Likewise, the notion that households are grateful to governments for issuing shedloads of bonds (yielding next to nothing) for them to buy is arrant nonsense. Indeed, it is central banks that are absorbing the lion’s share of the new issuance. In times of crisis, the tendency is for the national saving rate to fall, which is precisely what happened in 2008-09. US gross national saving, as a percentage of nominal GDP, fell from 19.2 per cent in 2006 to 13.9 per cent in 2009; Japan, from 29.0 per cent to 24.3 per cent; Germany, from 25.5 per cent to 24.0 per cent; France, from 23.3 per cent to 20.9 per cent; UK from 14.8 per cent to 11.0 per cent; Italy, from 20.4 per cent to 17.5 per cent and Canada, from 24.5 per cent to 18.4 per cent. Figure 1 shows the commonality of the experience.
Examining the UK economic accounts for the second quarter of 2020, as compared to a year earlier, the pattern is repeating (figure 2). Gross saving for the whole economy was down from £77bn to £54bn, representing a fall from 14.0 per cent of GDP to 11.9 per cent. For corporations, gross saving fell from 8.1 per cent to 7.5 per cent; for households, gross saving rose from 7.1 per cent to 25.5 per cent, but for general government, gross saving fell from -1.1 per cent to -21.1 per cent. Beware glib narratives about excess saving.
Figure 1
Data source: OECD
Figure 2
Data source: Thomson Reuters Datastream