Savings

Andy Lees in his very insightful Macro Strategy Partnership newsletter points out that Norway is having a little trouble making budgetary ends meet and will have to clip a little capital from the its oil industry:

Local currency non-oil tax income will no longer cover budget spending, forcing the government to dip into its oil and gas revenues. These revenues are in dollars, and some will have to be switched into crowns. “The taxes in Norwegian crowns will not be sufficient to cover the spending of petroleum reserves”.

Norway has been quite fortunate, they are a small country in terms of population with a very large oil and gas industry. Their ability to produce more than they have consumed has allowed them to pile up quite a large amount of net savings in the form of exported oil and gas. This appears to be changing.

While North Sea production has been falling for some time, I still think that this little anecdote reveals quite a bit about the financial system in the West. Savings rates are now very punk in the West and, as a consequence, capital investment is stagnant. This lack of capital formation is also crushing growth rates, employment and wage growth.

Overnight bank lending rates went negative recently in Europe for the first time. German Bund yields are negative out to four years now. Italian ten-year bond yields are now lower than those on ten year Treasury paper at around 2.35%. Of course, the level of savings is crashing as interest rates are pushed to an artificially low level. There is no longer any incentive to save in the West.

As these low rates destroy the incentive to create fresh capital via savings, real growth rates will shrink. When you force the system to consume its own seed corn, growth rates will suffer. In Norway, even booming asset prices and an oil price that has quintupled in the past 15 years aren’t generating sufficient economic growth and tax revenues to allow the system to build up its oil related savings any longer.

In the US, the net savings rate has averaged about 1% of GDP for the past decade and has run at just 2% year-to-date. This compares to about a 10% net savings rate in the 1950s and 1960s when real growth rates averaged 4%. The savings rate has continued to sink, pretty much in a straight line, ever since the US abandoned Bretton-Woods and the link to gold and the result has been a real growth rate of sub 2% for a decade now. 

Central bank interest rate policy is having an effect, but not the one intended.  Interest rate cuts were supposed to stimulate growth. Animal consumptive and investment spirits just needed a little push to get moving after the collapse of 2008, or so our Keynesian policy makers thought. Push rates down and watch the recovery blossom was their mantra. Unfortunately, the opposite is now occurring as consumption relative to savings is now very high, inhibiting a recovery in global growth, not an outcome the Keynesians would have thought possible.

Instead, the Austrian Business Cycle Theory seems to be offering the world a different, and more accurate, lens through which to view secular economic trends. Artificially drive rates down and you drive down capital formation and the attendant real rate of growth and real wealth creation.

Growth will not come roaring back until the previous malinvestment has been cleared from the system and interest rates are allowed to normalize so that the supply and demand for savings can meet. Present policies engender a lack of savings and capital formation as well as inflation in asset prices that is unjustified given the lack of savings and real growth to back them up. These interest rate policies also serve to lower employment and real wages. Without more capital in back of them, employees cannot become more productive and cannot see their wages increase. 

The world’s biggest savers, those in Asia, also appear to be less interested in saving in terms of Western fiat currencies. Also, as shown by the Norwegian example, when push comes to shove, with interest rates down at these levels the Chinese will, in my opinion, sell down their hoard of dollars and euros and consume. After all, why hold on to negative yielding paper?

The world is also very complacent about the threat of CPI inflation, but we may be very close to that point in time when the demand to hold the infinite amounts of non yielding paper that central bankers have created flips and becomes a desire to consume widgets before the next guy with a stack of Fed bucks beats you to it and drives the widget price into the stratosphere.

CPI inflation seems to me to be like the stored force behind a dam. Keynesian central bank policies have created a dam that is structurally unsound and ready to break.  More worrisome is the notion that central bankers around the world still seem intent on continually putting more proverbial water behind the dam and increasing the stored force there in the form of higher and higher asset prices. Time to move to higher ground.

Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.