What is savings?
We all know what it is at a personal level: I get 100$ check and might save 20$ out of it
But what is savings in the aggregate? Say for the world as a whole?
That's where it gets tricky.
e.g. people talk about a "global saving glut". But can we measure it?
We all know what it is at a personal level: I get 100$ check and might save 20$ out of it
But what is savings in the aggregate? Say for the world as a whole?
That's where it gets tricky.
e.g. people talk about a "global saving glut". But can we measure it?
Not really - at least not in a direct sense
The reason is that when a person (say Adam) "saves", someone else (say Eve) uses that saving, i.e. "dissaves", by borrowing it and spending it for one purpose or another
So, aggregate total saving is always exactly zero!
The reason is that when a person (say Adam) "saves", someone else (say Eve) uses that saving, i.e. "dissaves", by borrowing it and spending it for one purpose or another
So, aggregate total saving is always exactly zero!
Now you might say, that according to the world bank worldwide saving is about 25% of GDP historically.
What is that number about?
Well it is just an accounting convention!
What is that number about?
Well it is just an accounting convention!
Someone somewhere decided (for some good reasons at the time), that if Eve spends Adam's savings on capital goods (i.e. "investment"), then we will not count it as dissaving.
So what you get is an accounting identity:
Saving = Investment
So what you get is an accounting identity:
Saving = Investment
What the world bank data is telling us is that historically Eve borrows and spends about 25% of GDP on investment goods.
Now imagine something starts to change
Adam starts to save more and more, call it his "saving glut"
He needs Eve to borrow his additional savings
He convinces her to do that, but only after making it cheaper for her to borrow by lowering his interest rate
Adam starts to save more and more, call it his "saving glut"
He needs Eve to borrow his additional savings
He convinces her to do that, but only after making it cheaper for her to borrow by lowering his interest rate
However, Eve is not interested in spending her additional borrowing on capital goods, or investment
Instead Eve decides to "consume" it - throws a party, goes on vacation, that sort of stuff
The accounting convention will start counting Eve's additional spending as dissaving
Instead Eve decides to "consume" it - throws a party, goes on vacation, that sort of stuff
The accounting convention will start counting Eve's additional spending as dissaving
What this all means is that even though Adam *is* saving a lot more than before, total saving measured by our accounting standards will remain the same.
Yes, there is a "saving glut" - But aggregate national accounts will not show it!
Yes, there is a "saving glut" - But aggregate national accounts will not show it!
So if you really wanted to see the saving glut, you will have to see it indirectly
You will see it as a rise in total credit (remember Eve is borrowing more and more), as a fall in interest rate, and as a rise in Adam's personal savings
You will see it as a rise in total credit (remember Eve is borrowing more and more), as a fall in interest rate, and as a rise in Adam's personal savings
I think this is the world we actually live in now
Adam is the top 1%
And I have no idea why Eve does not invest more, but consumes her additional borrowing
Adam is the top 1%
And I have no idea why Eve does not invest more, but consumes her additional borrowing
ps: in recent years government has been borrowing and spending on Eve's behalf ... but same thing more or less
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