Negative savings in America
I was looking at national savings figures for the United States when the Australian National Accounts came out yesterday, which is why I belatedly noticed the negative households savings figure.
The US has also experienced a big decline in household savings, but they remain positive at around 3 per cent of GDP. Retained corporate earnings are between 0 and 2 per cent of GDP depending on how you measure depreciation. These small positive contributions are wiped out by the government budget deficit (around 5 per cent for the Federal government – the states are also in deficit, but I don’t have a number yet). More on all this is available from the Bureau of Economic Analysis.
One interpretation of all this is that people from outside the US (and, for that matter) Australia, are eager to buy US assets, and Americans are simply cashing in the consumption benefits. I don’t agree. A steady decline in household savings seems to be occurring wherever financial markets have been liberalised. At the moment, the whole system is being kept in balance by massive purchases of US dollars by Asian central banks, but this can’t continue indefinitely.
It’s therefore time to invoke Stein’s Law – if a process can’t continue indefinitely, it won’t. There seems no prospect of an exogenous shift in the behavior of households or of a return to fiscal probity by the US government. I conclude that a return to equilibrium must involve an increase in real and nominal interest rates, probably facilitated by inflation. Even allowing for an inflationary cushion, this will not be a pleasant process for heavily indebted Australian households. American householders are protected by the structure of mortgage contracts, which allows them to lock in low rates, but the costs will be borne elsewhere in the financial system.