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The story is basically this: the US and Europe, two economies worth 15 trillion Dollars of GDP a year, leverage themselves up to nearly 400% of their yearly income (private and public debt combined). Normally you'd think that borrowing on that kind of scale would create a major drain on savings, such that interest rates at which borrowing can occur show a rising trend. But this is NOT what happened. Interest rates showed a falling trend WHILE all this borrowing was going on. Apparently somewhere in the world, so many savings were being generated that the savings for this nearly 120 trillion Dollars worth of debt were not just matched, but EXCEEDED.
Where in the WORLD were these savings coming from? China? Don't make me laugh. It was worth barely 5 trillion Dollars at the height of the leverage bubble. It would need to generate 24 times it's GDP in savings to come close to meeting the savings demand, let alone exceeding it. Of course much of the savings came from with the US and Europe themselves, but this was not something that happened for any identifyable ex-ante reason. Not to the point of creating 400% of GDP in savings.
People who analyze debt from a mainstream framework of ideas tend to see "savings" as an unambiguously good thing, to the point of countering any criticism of excess indebtedness with the mantra that savings are being generated on an equally large scale. What they don't realize is that savings are a good thing only when the alternative is having NOTHING. In reality, as a result of vendor financing and endogenous money dynamics, savings are accepted for the provision of goods as a substitute FOR AN IMMEDIATE PAYMENT. This is what has been going on. When savings are themselves the generator of demand where immediately settled payments would have been the alternative, they are a NEGATIVE thing.
Let me put that in a diagram. It works basically like a scale from immediately settled payments, through savings/debts to having no payment at all:
IMMEDIATE PAYMENT (best)
IOU ACCEPTED FOR GOODS EXCHANGE (ok, at least you have something; but lets not let these IOUs pile up to much lest we don't get paid; these savings are good TO THE EXTENT there is a realistic plan for them to be paid down by the counterparty)
NO PAYMENT AT ALL (worst)
Going from line three to line two is a good thing. This is what mainstream economists understand.
Going from line one to line two is a bad thing. This is what mainstream economists miss (bewilderingly).
The alternative, then, to the savings glut theory is that the savings were to a large extent generated within the US and Europe's own borders, but this is not a reason to think all is OK. The savings are deferred payments for goods exchanges and in the absence of a realistic plan to have the debts paid down in aggregate, these will sooner or later be defaulted on. Such mass defaults, as seen in 2008, will lead to a collapse of industrial demand and a collapse of these fictive savings. In as far as there was ever a savings glut, it was a purely fictive one.
Where in the WORLD were these savings coming from? China? Don't make me laugh. It was worth barely 5 trillion Dollars at the height of the leverage bubble. It would need to generate 24 times it's GDP in savings to come close to meeting the savings demand, let alone exceeding it. Of course much of the savings came from with the US and Europe themselves, but this was not something that happened for any identifyable ex-ante reason. Not to the point of creating 400% of GDP in savings.
People who analyze debt from a mainstream framework of ideas tend to see "savings" as an unambiguously good thing, to the point of countering any criticism of excess indebtedness with the mantra that savings are being generated on an equally large scale. What they don't realize is that savings are a good thing only when the alternative is having NOTHING. In reality, as a result of vendor financing and endogenous money dynamics, savings are accepted for the provision of goods as a substitute FOR AN IMMEDIATE PAYMENT. This is what has been going on. When savings are themselves the generator of demand where immediately settled payments would have been the alternative, they are a NEGATIVE thing.
Let me put that in a diagram. It works basically like a scale from immediately settled payments, through savings/debts to having no payment at all:
IMMEDIATE PAYMENT (best)
IOU ACCEPTED FOR GOODS EXCHANGE (ok, at least you have something; but lets not let these IOUs pile up to much lest we don't get paid; these savings are good TO THE EXTENT there is a realistic plan for them to be paid down by the counterparty)
NO PAYMENT AT ALL (worst)
Going from line three to line two is a good thing. This is what mainstream economists understand.
Going from line one to line two is a bad thing. This is what mainstream economists miss (bewilderingly).
The alternative, then, to the savings glut theory is that the savings were to a large extent generated within the US and Europe's own borders, but this is not a reason to think all is OK. The savings are deferred payments for goods exchanges and in the absence of a realistic plan to have the debts paid down in aggregate, these will sooner or later be defaulted on. Such mass defaults, as seen in 2008, will lead to a collapse of industrial demand and a collapse of these fictive savings. In as far as there was ever a savings glut, it was a purely fictive one.
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