Wednesday, 7 December 2016

“Saving Glut and Low Real Interest Rate” : How this may impact your investment.


Saving : A Virtue or a Vice




The habit of saving always being referred to as a form of “virtue “ in our life and also being encouraged by our parents or financial planner almost universally.

Classical economists regarded saving as a virtue and the act of saving virtuous, because according to them, when an individual saves more by spending less on consumption goods, he accumulates a surplus. This surplus can be utilized in the interest of the economy as a whole in term of investment.


However, some unorthodox consumption theorists often attacked the classical theories of saving. Based on their belief , there was no virtue involved in the act of saving because, they argued that an increase in aggregate saving would lead to growing under-consumption which would cause such an overall reduction in demand as ultimately to lead to over-production, unemployment and economic crisis.

Keynes also shattered the classical belief in the virtue of saving when he wrote his General Theory in 1936. He, however, took a middle position between the classicists and the group of economist who propose strongly the under-consumption theory. In his opinion, it was not so important whether an individual saved or not, but what was more important was what use he made of his saving.

While Keynes try to explain it under the context of “Paradox of Thrift “ ( Click here for more detail )  : It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as investments give lower returns than normal.

Keynes further said that such a mass increase in savings eventually hurts the economy as a whole. Thrift or saving might be good in individual level as prudent financial planning and for contingencies use , but when it move towards macro level , it might not be a good thing or counter-productive in term of economic growth.  This is why he called the saving as a “private virtue but a public vice “.
While it might be hard to determine the good or bad or being thrift , but this has led to another problem raised recently which is “ Saving Glut “.

When come to this , it might not be the case of " The Wisdom of Crowds " .


What is Global Saving Glut  or GSG ? by Wikipedia



Global saving glut (also global savings glut, GSG, cash hoarding, dead cash, dead money, glut of excess intended saving, shortfall of investment intentions), describes a situation in which desired saving exceeds desired investment. 

By 2005 Ben Bernanke, chairman of the Federal Reserve, the central bank of the United States, expressed concern about the "significant increase in the global supply of saving" and its implications for monetary policies, particularly in the United States.

Although Bernanke's analyses focused on events in 2003 to 2007 that led to the 2007–2009 financial crisis, regarding GSG countries and the United States, excessive saving by the non-financial corporate sector (NFCS) is an ongoing phenomenon, affecting many countries.

 Bernanke's "celebrated (if sometimes disputed)" global saving glut (GSG) hypothesis argued that increased capital inflows to the United States from GSG countries were an important reason that U.S. longer-term interest rates from 2003 to 2007 were lower than expected.


Factors in low real interest rates


This is a paper published by two economist from Bank Of England ( Lukasz Rachel and Thomas D Smith) who try propose an answer to this situation of low real interest due to saving glut .
In their report , both have argued that ) demographics change ,2) rising inequality  and 3) global saving glut has led to shifting in “Desire saving schedule “ curve . While another 3 factors which led to lower “ Desire  Investment schedule “ like 1) Price of capital , 2) lesser public investment and 3) rise in spread.





If this is the correct analysis, what does it imply for what we can expect in the future? The paper concludes:

most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers– not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.



You may find the article from Econbrowser.com (here )


If the report is true that interest rate is going to be in low level for coming years , then the “ Trumponomics “ which propose lower tax and increase government’s spending on infrastructure may pull our economy from the dilemma of “saving glut “ . Let’s pray for the best .  J
Also , the low interest rate environment  will be good for investment asset like REIT and Business Trust !! ( which is good for me as my portfolio is having about 70% of these 2 asset class )


What do you think ? do you have enough saving or save too much ?

 As Christmas and Holiday season is juts around the corner , a little bit increase in spending might be wise and good for overall economy.  :-)


Cheers !





“ Virtue is more to be feared than vice , because its excesses are not subject to the regulation of conscience. “ by Adam Smith



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