Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21
Corsair H150i Pro iCUE Firmware Update Says Bye Bye - H100i, H115i, Bricked Jet Engine Fans Fix - 27th Apr 21
Bude Cliff Walk and Secluded Pebble Beach Tour in VR 360 - Cornwall UK Holidays 2021 - 27th Apr 21
The Top 3 CBD Oils with Anti-Inflammatory Properties for Stopping Pain - 27th Apr 21 -
Biden’s Green New Deal - 27th Apr 21
Gold Stocks Upleg Accelerates - 27th Apr 21
The Tax Plan to Slay the Stocks Bull Market? - 26th Apr 21
See What’s Next for European Markets - 26th Apr 21
Gold's Perfect Storm - 26th Apr 21
Biden’s ‘Green Reset’ Could Be Great for Silver - 26th Apr 21
SPX Stock Market Short Squeeze – Here Or Not? - 25th Apr 21
Fiscal Guilt: What a Shift in Monetary Policy Portends for Investors - 25th Apr 21
Gold Price Reversal? Have No Fear! - 24th Apr 21
No Fear Of Inflation; Threat Of Deflation - 24th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Savings Glut vs. Low Interest Rates

Economics / Economic Theory Sep 01, 2013 - 10:44 PM GMT

By: David_Howden

Economics

Five years after the worst financial crisis since the Great Depression, economists are still starkly divided as to its causes. Perhaps this is not too surprising as we are now more than 80 years past the Great Depression with little end in sight to the debate surrounding the causes of that downturn.

Most economists fall into one of two camps when explaining where the imbalances originated that led up to the current crisis. Austrian School economists are in the unique position of being able to reconcile these two camps, even while favoring the first explanation to the second.


The first camp, which includes most Austrian School economists, looks at the imbalances caused by central bank interest rate policy being set “too low for too long.” In this view, artificially low interest rates allowed for erroneous capital investments following the dot-com bust of 2001, and continuing to the present time.

The Federal Reserve’s artificial reduction of interest rates (to use the U.S. as a proxy for the Western world) put in motion two shifts in the economy. The first was the decrease in savings by Americans, and a corresponding consumption-led boom (what Mises called “overconsumption”). The second was the overall decrease in investment and production in the lower stages of the capital structure, with a corresponding increase in investment and production in the higher stages. This shift is what Mises termed “malinvestment.” Note that this shift does not represent an “overinvestment” in capital, as is commonly and erroneously claimed by non-Austrian economists, but rather a temporal shifting of productive activity from stages closer to consumption to those further away.

Specifically, we see malinvestment in the large-scale shift of capital away from manufacturing in favor of higher-order research and development. Overconsumption, on the other hand, is illustrated by the rise of consumer culture embodied by big box stores and a plethora of shopping malls and outlet stores.

In the opposite camp are the economists favoring the “excess savings view” or the “global savings glut hypothesis.” These economists view the crisis as a result of current account surpluses, primarily in Asian countries, that led to financial imbalances in Western economies.

As consumers consumed more but the economy restructured itself away from producing consumer goods, an increase in imports was inevitable. As luck would have it, developing countries — and especially Asian countries — were in the reverse position of the U.S., and years of financial underdevelopment left many of them with immature financial markets. These Asian countries also proved to be low-cost producers of many products. As Americans increased their imports from these countries to feed their own unsustainable consumption-led boom, the net proceeds in these countries had no developed domestic financial markets to invest in.

In response, these funds were channeled back to U.S. financial markets, and in the views of those who favor the saving glut theory, this is was set in motion the unsustainable boom. As time went on, the trade surpluses in Asia resulted in net capital outflows in search of a market to invest in. Western economies that were the recipients of these capital flows witnessed remarkably low interest rates and credit booms with a corresponding buildup of debt.

Thus, in the view of proponents of the savings glut theory, the Federal Reserve was not the cause of lower interest rates, but rather it was a passive observer as interest rates were lowered exogenously from these foreign sources.

Yet proponents of the global savings glut hypothesis must grapple with one unanswered question: What caused citizens of Asian countries to increase their savings rate and destabilize Western economies with their excess capital outflows? One could take the view that savings rates are exogenously determined — e.g., by animal spirits — yet this “explanation” only pushes the problem one step back. What determines these animal spirits?

To find a satisfying answer we must look at the role of monetary policy in determining saving rates.

There is no need to look to animal spirits or any ill-defined exogenous force to explain why developing countries increased their savings so much during the boom and funneled these savings into Western financial markets. The unsustainable boom propagated by Western central banks set this process in motion by creating a disconnect between the consumption demands with the domestic productive capacity of their economies.

Moreover, the current ire directed at the loss of manufacturing in the United States is not the result of “greedy outsourcers” or even “currency manipulators” in Asian countries. The loss of productive capacity in the U.S. is the outcome of a too-low interest rate policy by the Federal Reserve incentivizing entrepreneurs to move their investments to the higher stages of production — those furthest from final consumption — while simultaneously incentivizing consumers to increase their present consumption at the expense of savings.

David Howden is Chair of the Department of Business and Economics, and associate professor of economics at St. Louis University, at its Madrid Campus , and winner of the Mises Institute's Douglas E. French Prize. Send him mail. See his article archives. Comment on the blog.

© 2013 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in