Let’s Blame The Savers

Just like in the world of fashion, economic terminologies come in and out of vogue. One such economic term trending recently is Secular Stagnation. First proposed by Keynesian economist Alvin Hansen back in the 1930s, Secular Stagnation was coined to explain America’s dismal economic performance—in which sluggish growth and employment levels were well below potential. 

The term is now back in style thanks to the likes of the contemporary heroes of Keynesian economics, like Larry Summers and Paul Krugman; and is based on the notion that a chronic savings glut has resulted in the economy operating well below potential. The notion that the developed world is trapped in some type of stagnation is something I can agree with. 

However, the reasoning offered for this stagnation completely dismisses the role of central banks and assumes low growth and interest rates are instead being driven by those pesky savers. This theory is not only philosophically and economically bankrupt, it also dismisses all of the factual evidence about the actual decline in worldwide savings rates. 

What Krugman and Summers fail to realize is; when interest rates are high, people are compelled to save more. And on the other hand, when interest rates are low they tend to save less. Supporting this theory, in the 1970s when interest rates neared 20%, the US savings rate hit an all-time high of 14.6%; today it averages closer to 5%.

Not surprisingly, Japan, the poster child for secular stagnation, has seen a shocking drop in household savings. Savings rates that averaged as much as 20% in the 1980’s, hit a negative 1.3% in March of 2014. It’s no coincidence that this negative savings rater concurred with its 0.3% 10-Year Note yield and highly-negative real interest rates. 

Savings in the European Union has also fallen along with lower interest rates manufactured by the ECB. Household savings was at 13.3% in 2009, but fell to 10.5% by the first quarter of 2014. The truth is despite Summers and Krugman’s desire to lay the “blame” with savers, there is no proof of a world-wide savings glut. These Keynesians never seek to explain who or what would have caused global consumers to undergo such a mass hypnosis into the propensity to increase savings.