Too much saving caused the economic crisis

Let me expand on the claim by asking "what really is saving?" 

Initially it was about stashing away some food for a rainy day. That the fresh meat could rot had to be accepted, losing some was still better than outright starving later.

On the other side, if there is an opportunity to invest in an increased output of useful products or services using less resources then a return could be negotiated. But if no increase in the rate of value creation is obtainable there is no need for funds nor would there be a yield to be had.

If I have 9 cows and a bull and the yield is 1 calf per year, year after year, there is no reason why I should borrow anything. But if, by building a shelter, I could increase that to 2 calves per year it would make sense to borrow and build. But only if interest, annual principal repayment and my living expenses added up to less than 2 calves. 

You are at all times free to stash away for a rainy day, no return on those savings of course, most probably negative earnings. Still your sole prerogative.

But if you want a return on your savings you have to find somebody, directly or indirectly, that has a way to invest in increased rate of value creation. Such savings cannot be pushed, it has to be pulled, that privilege is the borrower's.

In other words saving is either: 

1. Stashing away while accepting loss of value or 
2. investment in increased output of useful products and services.

But at some point of time we got used to getting a return, to the point where we're now hardwired to believe that we can save at any time and get a return from the savings. But as opportunities to invest in increased value creation comes in leaps and bounds, like when a new technology or method is invented, saving with a return should not always to be had.

That opened for new professions to create "saving forms" decoupled from investing in increased value creation. In other words, savings that mostly could be termed humbug. 

And the humbug could take three forms:

1. Investment in scarcity. Expensive watches, art, real estate, gold. Investing in a flat on Manhattan makes sense as long as there is increasing value creation elsewhere in the society, wealth that flows into New York eventually in the form of people moving there. But soon that could turn and the zero-sum game becomes a reality. And I'm not saying art and the other scarce products do not have a value, they have, but they do not increase the value creation and should not yield a real return. Having been conditioned to believe something does not necessarily make it true. "Gold? Dig it up, then bury it, then dig it up, and bury it again, so where's the value creation?" 
2. Power leverage. You're sitting on excess funds today while the younger generation struggles. That creates an opportunity for you to lend it to the younger generation for their consumption today, then sit back and see them work twice as hard as you had to in order to pay back with interest. They have little choice, you can push through high interest, hence the power leverage. (In fact much of the scarcity investing is a version of this, sell your inflated value big house to a young family and you get the point.)
3. Schemes and fakes. Read any paper from last nine months and take your pick among the disaster "instruments" for further study.

There is only one way out of this crisis and the saving-investment need mismatch; find the balance. That can be had by less saving or increases in value creation. Everything else is a waste of time or at best band-aiding a broken leg. 

In the latter part of the last century the US personal saving rate was much higher than today, but then it was a period of huge investment needs world-wide in infrastructure, new manufacturing methods and equipment including IT - all increasing the world's value creation. The last few years we've seen much lower saving rates, more matching the lack of opportunities to invest in value creation increases. But then, typically China and the oil producing countries saved huge amounts that increased the imbalance tremendously despite low saving rates in the US.

Good thing that the world's governments seems to be well underway to do their part in the investment bit, hope is that it's towards real increases in value creation. Bad thing is that saving is increasing as well.

At the end of the day, the way to find the balance is to remove the universal notion that we have a prerogative to save with a return while exposing the "humbug" saving for what it really is. That would be the only long term fix.

[Hat tip to my friend Pete (url free alas) who prompted the discussion.]

Comments

[brian]

This perspective is commonly held and longly defended. However, its a bit like saying the reason newspapers are failing is because it involves reading. You can't have one without the other.

Savings or capital formation is the basis from which investment is initiated. Typically, when individuals or businesses believe there's a bigger payoff for speculation over savings/production, bubbles form. When compounded with ease of debt, those same bubbles are fueled to extraordinary heights.

Those that benefit from the bubble rush to stimulate spending when it pops.

Naturally, markets self-correct and find balance to the extent their not coerced by intervening forces. Forces such as over abundance of credit or price fixing - typically exacted by governmental entities trying to control market shifts.

The fact that the US savings rate deteriorated reflects a few conditions. For example, abundance of unsustainable credit, nominal inflation (which is and has been conveniently denied by the government), speculative rewards, and an imbalance in foreign production.

This is not to say that permanent saving is a virtue. Far from it, but the reward for saving is consumption/investment. Far too many people have grown up in an environment that didn't observe that social/economic fact - and consequently couldn't see any of this coming.

Now about gold. It has only a modest intrinsic value, but is observed as form of money as a exchange currency. While it doesn't create value, it does act as a counter balance to well-intentioned, but economically blind policy makers responsible for currency. As the dollar continues to reach new lows as its buying power diminishes, gold will be exchangeable well after the dollars nominal demise. To that extent, it is a useful store of value.