In my last blog post, I asked, “Is this the end of secular stagnation?,” which I defined as low nominal economic growth due to insufficient aggregate demand. While I didn’t (and still don’t) have a simple “yes” or “no” answer, I shared my latest thinking on the topic, including some investment positioning ideas for clients.
This time, I’d like to look more closely at one of the main causes of secular stagnation — a global “savings glut” over the past decade-plus — and whether it’s likely to persist going forward.
How did we end up with a savings glut?
Outside the US, the “savings glut” to which I refer dates back to before the 2008 global financial crisis (GFC). Following the GFC, the US also began to accumulate significant excess savings relative to its wealth. The US has experienced higher growth in real personal incomes over the past decade than in the previous two, yet consumption growth has not kept pace.
Consider the relationship between net worth and disposable personal income relative to the savings rate, which had been stable prior to 2010; as consumers’ wealth increased vis à vis their income, they were inclined to spend more. That relationship broke down after 2010; as Americans grew wealthier, with net worth/income at all-time highs, there was no correlation to savings behavior.
Typically, higher savings rates boost nominal-growth rates as those savings are recycled into investments. With secular stagnation, however, household deleveraging lifts savings and lowers consumption, leading businesses to invest less. After the GFC, US consumers retrenched amid plummeting housing values. Much of the resulting savings glut made its way into the stock market, benefiting the richest members of society (whose marginal propensity to consume is near 0) and reinforcing the trend of excess savings.
More or less US savings going forward?
Looking ahead, I am optimistic that the US savings rate will decline, for a couple of reasons:
- At this juncture, the housing market appears stronger than it’s been in over a decade, as the COVID-19 crisis has helped to catalyze demand for suburban housing. Psychologically, there’s something more tangible about housing-price gains than stock-market gains, at least in terms of the impact on consumer spending: The average consumer tends to feel “richer” if the value of their home goes up 25% than if their retirement savings earn 25%.
- The government’s massive response to COVID should help ease many consumers’ economic fears and dissuade them from feeling they need to maintain lofty savings rates. A divided Congress, in an election year, in a highly acrimonious political climate, passed the largest fiscal package in US history in record time. I’d be surprised if fiscal stimulus of this magnitude didn’t encourage many consumers to draw down their savings post-COVID.
To be clear, I do not expect a return to the type of frenetic consumption seen in the early 2000s, in part because an aging population should provide some future support for savings. However, I do think savings rates — not only in the US, but globally — are likely to drop (and stay) below the elevated levels that marked most of the 2010s.
The fate of savings beyond the US
It is equally important to talk about China and Europe in regard to global savings, as these are the countries former Fed Chair Ben Bernanke was referring to when he discussed the “savings glut” in 2005. Before the GFC, global savings largely came from China, whose artificially cheap currency, low real interest rates, and subsidized export sector allowed it to amass sizable dollar reserves that were deployed into US Treasuries, reducing interest rates. China’s current-account surplus has narrowed considerably, while the government’s focus on consumption-led growth should help limit future savings from China.
Meanwhile, Europe, particularly Germany, has taken the lead on global savings post-GFC. But there is reason to think this trend will also reverse. First, Europe has largely abandoned the fiscal austerity that marked the post-GFC era. Second, German house prices are rising dramatically, which should foster more domestic consumption. This housing-price surge had been notably absent from pre-GFC Germany.
The ongoing decline in global savings could help usher in a higher nominal-growth environment and an end to secular stagnation. Strikingly, the supply of government bonds might be a key determinant of global yields for the first time in decades. In my next blog post, I will focus on the effect monetary policy has had on secular stagnation.