A Cause of Rational Low Saving

by Don Boudreaux on April 7, 2006

in Trade

In yesterday’s Wall Street Journal, Lawrence Lindsey wrote about the Chinese government’s policy of not allowing the value of the yuan to rise against that of the dollar:

America, however, benefits from this arrangement. The Chinese clearly
undervalue their exchange rate. This means American consumers are able
to buy goods at an artificially low price, making them winners. In
order to maintain this arrangement, the People’s Bank of China must buy
excess dollars, and has accumulated nearly $1 trillion of reserves.
Since it has no domestic use for them, it turns around and lends them
back to America in our Treasury, corporate and housing loan markets.
This means that both Treasury borrowing costs and mortgage interest
rates are lower than they otherwise would be. American homeowners and
taxpayers are winners as a result.
…..
When [China's President] Mr. Hu visits America, he will do his best to diffuse tensions
about the U.S. current account deficit, which he sees as the basis of
our concern about his currency policies. He will argue that our current
account deficit is largely determined by the fact that we consume too
much and save too little. Many American economists will echo this
sentiment. But it is disingenuous for Mr. Hu to make this argument
since it is his policies that subsidize both our consumption and our
borrowing by lowering the prices of these activities. And, in America,
unlike in China, it is market-determined relative prices that drive
economic decision-making.

Without here getting into the question of whether or not Uncle Sam would be wise to pressure China to let the value of the yuan rise, Lindsey’s remarks imply that, even as conventionally reckoned, Americans’ savings rate is not irresponsibly low.  If foreign governments are forcing their citizens to subsidize Americans’ consumption, what’s irrational or irresponsible about Americans relying upon these subsidies and, thus, consuming more and saving less?

Put differently, if foreign-govenment monetary and trade policies truly are lowering the cost to Americans of consuming more today, it’s off-the-mark to lay the blame for Americans’ low saving rate on Americans’ irrationality, irresponsibility, myopia, stupidity, laziness, or crass materialism.

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  • Keith

    Perhaps we have a problem of semantics. Are we talking about saving or investing?.


    I do invest: in my real property (mainly for the tax write off), in my marketable knowledge and skills, in my children's education, in things that are good short-term risks, etc.


    I don't expect the government to give me anything (including stability in the monetary system, legal protection for my property, or even liberty of my person). What good are "finiancial resources" when they aren't worth the paper they're written on.


    If/When the shit really hits the fan, all you're left with is your flesh and bones, the knowledge in your head, and what you can carry. Anything else you'll have to fight for. Some might say the shit is already hitting the fan (start by reading the deductions on your pay stub).


  • Kim Duncan

    Keith,


    The best reason to save is to invest in your own business with a view towards compounding your present purchasing power in real terms. However, you are reacting they way I believe the government would like you to react - they are doing everything in their powers to encourage you to consume today. Nonetheless, the government does not have your back. You are responsible for yourself. So, if you get sick, fired or whatever, you should have your own financial resources to rely upon to see you through the risks of life.


    That says nothing about what your savings should be invested in. Just because the dollar is losing purchasing power doesn't mean that your savings need lose purchasing power.

  • Noah Yetter

    Keith is right on the money.


    Like "the average man," the "national savings rate" is a pure statistical construct, and as such does not exist. Only individuals make decisions to save or to consume, and only individuals feel the consequences of those decisions. Most importantly, all of those decisions are not the same.

  • Keith

    So much collectivist thinking on a libertarian blog.


    I don't save much because I see the government dept rising, government spending rising, and no sign that either will be slowing down soon. Why should I save money that will inevitably be worth less in the future? If I spend it now, I get the benefit of the property I purchase. If somebody wants to confiscate my property in the future, at least I've had the benefit of owning it until then.


    Give me a non-collectivist reason to save more, and I'll listen.


  • Kim Duncan

    The U.S. hegemony, in which the majority of Americans (something like 80% of whom have never travelled outside of the country) believe that we should dictate to the rest of the world the values according to which they should live and the means which they should employ in the management of their own affairs, is contrary to the principles upon which the country was founded. So, yes, I believe we should put less pressure on China and focus more on our own actions which cause low savings rates and for that matter, obesity, high rates of murder, high rates of drug use, etc. I am sure most Americans blame Columbia for their drug habit but until they take a look in the mirror and take responsibility they will make little progress in the "War on Drugs".


    The cause of lower savings rates in the U.S. is a fiat currency with no limits on its creation. There is no limit to Federal debt in all practicality if currency can be created without limit. There is only a very high debt limit on consumer debt (including housing debt) since now balance sheets pose no constraint - only income statements (self verified) matter and book values are completely ignored. Once Nixon broke the link to gold in international settlements, the die was cast. No pressure on China is going to correct that - they are just taking the place of Japan as the latest economic boogie man. The U.S. does not have the stomach to put its economic ship in order without some crisis as a catalyst.


    Spencer, there are no tax policies (other than the abolition of taxes altogether) that will correct the saving ship outside of a short term blip. As long as citizens believe that the government has underwritten their downside through various social insurance programs (oxymoronic by proof), they will underwrite less of their own risk through savings. For heaven sakes, why save when you can always tap perpetually growing home equity? Or why save when the real value of those savings are declining? Or, if all else fails, the Fed will monetize your debts and the government will kick in unemployment insurance and, if your bank goes down, deposit insurance. Not to mention the plethora of aid programs that future administrations will create if things really get bad.


    Let China do what it wants with its currency (not that I think a fixed $ peg is the best course of action for their citizens but then again they are a communist country whose leaders have little regard for their citizens). We did what we wanted when we effectively defaulted on our debts in 1971 by breaking the link with gold. Who are we to preach? Besides, the reason why we want China to break the peg in the first place is so that we can devalue the dollar (further robbing those U.S. citizens who have decided to save of their purchasing power).


    But by all means, if we are going to tell the rest of the world how they should act, let's live by the standards we preach before we enforce our views on the rest of the world. If we denounce government interference in the currency markets, let's stop manipulating our own currency (and for that matter our other markets as well - including bonds, equities, housing, etc.).


    As long as U.S. citizens believe that the government has "got their back", the low savings rates will predominate. Only a crisis will reverse these decades long trends.

  • spencer

    the savings rate has been falling at a very stable rate since 1981 -- about the time we started implementing tax policies designed to incourage savings. Seems that supply side policy has not worked so well.


    But anyway would you please explain how the Chinese policy caused the savings rate to fall in the 1980s and early 1990s when the US had minimal economic relationships with China.


    Isn't this your thesis?

  • Ray

    Quote:

    "We can't continue to tell the rest of the world how to live and act duplicitously at the same time."


    I thought one of the basic premises of this post was that the US wasn't pressuring China enough. You're saying that the US is pressuring China too much?

  • Kim Duncan

    These days it is unpopular to consider balance sheets as a meaningful constraint on credit - cashflow multiples are the primary underwriting tool of our time. However, if we continue to accumulate debt at a ratio of 4 to 1 against our incomes (debt growth divided by nominal GDP) over the full cycle, we are going to have a serious balance sheet problem. Many individuals already do and obviously, whether on public debt outstanding or accrued liabilities basis, the government already has a debt problem. Nonetheless, if we take this "subsidy" to build up our debt loads in perpetuity (in the process we get very excited about the mark to market gains in our assets driven by credit), we are going to have balance sheets that can not withstand any adversity. Not only that, we are going to have barely solvent balance sheets based upon debt-to-market value ratios where those market values are a multiple of book values (which is temporarily possible in capitalism when it is more profitable to trade paper claims than it is to build capital assets).


    Now, with this elevated debt situation where our margins for error are razor thin, what happens when China decides to remove the subsidy when it is in their own interests to do so? Higher real rates will put pressure on those elevated valuation multiples on the collateral assets supporting our debt loads. Our incomes are barely sufficient to meet interest payments. The government really has no capacity to step in and provide a security blanket.


    Oh yeah - to whom are we going to sell our houses in order to pay down our debt?


    I'm with bbartlog on this one.


    And one other thing - why point the finger at the Chinese when the actions of our own central bank (growing money faster than nominal GDP for more than a decade) are clearly a causal factor in low savings rates domestically, elevated debt levels, rolling asset bubbles and at least partly responsible for reserve accumulation by foreign central banks which try to absord overwhelming (relative to the size of their economies) speculative capital flows (much of which is "fast money" - leveraged speculative capital run by hedge funds and private equity firms)?


    We can't continue to tell the rest of the world how to live and act duplicitously at the same time. If we do, we should not be surprised to receive the proverbial finger.

  • Don Boudreaux wrote: "Put differently, if foreign-govenment monetary and trade policies truly are lowering the cost to Americans of consuming more today, it's off-the-mark to lay the blame for Americans' low saving rate on Americans' irrationality, irresponsibility, myopia, stupidity, laziness, or crass materialism."


    Exactly.


    The other side of the coin though, is that because the Chinese are competing for investments in interest instruments, it lowers the real return for those instruments, and a result is that Americans get a worse return on the money they invest (that's why they choose to consume). So the Chinese money may (if excessive) have a negative impact on investors (buyers of interest instruments) in the United States.

  • I agree with Don, if I understand what he is arguing here.


    The Chinese are being the central interventionists here. They should stop.


    But I still fail to see why the US is so powerless to do anything about it, given that there are two parties to every one of these secondary transactions: the Chinese offer us dollars for US Treasury securities, and we willingly sell them some.


  • RP

    Pricing is not the sole determinant of "rational" anything. If you don't believe me, perhaps you would like a free first hit of heroin? Yeah, I thought so...lame.

  • bbartlog

    When the dollar falls relative to the yuan, as it eventually must, the holders of those trillion dollars of reserves (or debt; doesn't matter) are going to take a financial beating vis-a-vis their yuan-holding peers. Of course, you could argue that everyone in America will also suddenly become poorer compared to the Chinese, but purchasing power parity being what it is the case there is not so clear cut at all. I do imagine oil will become more expensive, though.

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