The Central Bank War On Savers—–The Big Lie Beneath
by David Stockman, Contra Corner The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino. Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice. That’s right. A return that amounts to one Starbucks’ cappuccino per day on a $200,000 nest egg is purportedly not the result of massive central bank intrusion in financial markets and pegging interest rates at the zero bound; it’s owing to a global “savings glut” and low economic growth. Thus, Mario Draghi insisted recently that ultra loose monetary policy and NIRP are,
……… “not the problem, but a symptom of an underlying problem” caused by a“global excess of savings” and a lack of appetite for investment……This excess — dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman — lay behind a historical decline in interest rates in recent decades, the ECB president said.
Nor did Draghi even bother to blame it soley on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxcon factories assembling iPhones. Said Europe’s mad money printer:
The single currency area was “also a protagonist…….”
Actually, that’s a bald faced lie. The household savings rate in the eurozone has been declining ever since the inception of the single currency. And that long-term erosion has not slowed one wit since Draghi issued his “whatever it takes” ukase in August 2012. Yes, double-talking central bankers like Draghi slip in some statistical subterfuge, claiming “current account surpluses” are the same thing as “national savings”. Actually, they are nothing of the kind; current account surpluses and deficits are an accounting identity within the world’s Keynesian GDP accounting schemes, and for all nations combined add to zero save for statistical discrepancies. In fact, current account surpluses and deficits are a function of central bank credit and FX policies and their impact on domestic wages, prices and costs. Chronic current account surpluses result from pegging exchange rates below economic levels and thereby repressing domestic wages and prices, and chronic deficits from the opposite. Stated differently, what central bankers claim to be “excess savings” generated by households and businesses, which need to be punished for their sins, are actually deformations of world trade and capital flows that are rooted in the machination of central bankers themselves. That much is evident in Draghi’s own numbers. He chides Germany and the eurozone for fueling the savings glut as represented by 5% and 3% of GDP current account surpluses. But that’s a case of the cat calling the kettle black, if there ever was one. During the 14 years before Draghi’s mid-2012 “whatever it takes” ukase, which meant that he was fixing to trash the then prevailing exchange rate of 1.40-1.50 dollars per euro, the eurozone did not have a current account surplus! What Draghi sites as the problem he is fixing is mainly his own creation. That is, it is a result of the 25% currency depreciation the ECB effected under his leadership, and also the temporary improvement in Europe’s terms of trade owing to the global oil and commodities glut. And even in the latter case it is central banker action that originally led to the cheap credit boom of the last two decades and resulting over-investment in energy and mining production capacity. In any event, the eurozone surpluses since 2011 shown below do not represent consumers and business failing to spend enough and hoarding their cash. To the contrary, these accounting surpluses are just another phase of the world’s massively deformed system of global trade and capital flows. The latter, in turn, is the fruit of a rotten regime of central bank falsification of money and capital markets. In fact, when savings are honestly measured, there is not a single major DM economy in the world that has not experienced a severe decline in its household savings rate over the last several decades. The US household savings rate, for example, has not only dropped by more than half, but in so doing it was going in exactly the wrong direction. That is, the giant 78 million plus baby boom generation was demographically ambling toward the inflection point of massive retirement waves beginning in 2010. The savings rate should have been rising toward a generational peak, not sliding into the sub-basement of history. In this regard, Japan is the poster child for the truth of the matter, which is that we have actually had the opposite——an anti-savings famine in most of the world. Thus, Japan’s much vaunted high saving households back in its pre-1990 boom times have literally disappeared from the face of the earth. Yet this baleful development occurred just when Japan needed to be building a considerable savings nest egg for the decades ahead when it will essentially morph into a giant retirement colony. The deep secular decline of household savings rates throughout the DM world is in itself the tip-off that central banks have drastically deformed the financial system, and are now telling the proverbial Big Lie about a phony “savings glut” in order to justify their continued savage assault on depositors. That’s because under any historical rule of sound money, the kind of investment boom experienced by the EM world during the last two decades would have been accompanied by the upsurge of a large savings surplus in the DM economies. During the great global growth and industrialization boom between 1870 and 1914, for example, Great Britain, France, Holland and, to a lesser degree, Germany were huge exporters of capital. By contrast, the emerging markets of the day——the United States, Argentina, Russia, India, Australia etc.——-were major capital importers. That made tremendous economic sense. The advanced economies of the day earned trade surpluses exporting machinery, rolling stock, steel and chemicals and consumer manufactures, and then reinvested these surpluses in loans and investments in ships, mines, railroads, factories, ports and public infrastructure in the developing economies. The lynch-pin of this virtuous circle, of course, was common global money. That is, currencies that had a constant weight in gold, and which, accordingly, were convertible at fixed rates over long stretches of time. English investors and insurance companies, for example, invested in sterling denominated bonds issued by foreign borrowers because they knew the bonds were good as gold, and that their only real risk was borrower defaults on interest or principal. Today’s world of printing press money has turned the logic of gold standard capitalism upside down. Accordingly, during the last several decades the east Asian manufacturers and petro-economies have purportedly become varacious savers and capital exporters, while the most advanced economy on the planet has become a giant capital importer. Indeed, Keynesian economists and so-called conservative monetarists alike have proclaimed these huge, chronic US current account surpluses to be a wonderful thing. No it isn’t. Donald Trump is right—–even if for the wrong reason. The US has borrowed approximately $8 trillion from the rest of the world since the 1970’s not pursuant to the laws of economics, as the Keynesian/monetarist consensus proclaims. Instead, the unbroken string of giant current account deficits shown below——-the basic measure of annual borrowing from abroad——were accumulated in violation of the laws of sound money; and were, in fact, enabled by Richard Nixon’s abandonment of the dollar’s convertibility to a fixed weight of gold in August 1971. At length, the unshackled Fed found one excuse after another to flood the world with dollar liabilities. In fact, the Fed’s balance sheet liabilities (i.e. dollars) totaled just $45 billion in August 1971, meaning that it has exploded by 100X to $4.5 trillion in the years since. This vast inflation of the monetary system, in turn, enabled total credit outstanding in the US economy to soar from $1.7 trillion at the time of Camp David to $63.5 trillion at present. That means the US economy’s ratio of total public and private debt to national income surged from its historic level of 1.5X in 1971 to 3.5X today. Needless to say, the evil of this kind of massive money and credit inflation is that it is contagious. The last 45 years have proven in spades that there is no such thing as printing press money in one country. In fact, the borrowing binge in America, Japan and Europe played right into the hands of the mercantilist policy-makers in East Asia and the petro-states. By pegging their currencies not to a fixed standard like gold, but to the massive emission of floating dollars, they appeared to become prodigious capital exporters and “savers”. That’s because in order to keep their currencies from soaring against depreciating dollars and euros, their central banks accumulated huge amounts of US treasuries and euro debt in the process of chronic, heavy-handed intervention in the FX markets. Folks, that’s not a savings glut; it’s the consequences of massive money printing and credit expansion on a worldwide basis. Had China not depreciated it currency by 60% in 1994 and kept it more or less linked to the Fed’s flood of dollars ever since, its vaunted $4 trillion of FX reserves and the60X expansion of its domestic credit—from $500 billion in the mid-1990s to $30 trillion at present—–would not have happened in a million years. The graphs below, therefore, have nothing to do with a “savings glut”. Had China’s currency been linked to gold in 1994, the dollars exchange rate against the RMB would have collapsed long ago, and America’s ability to live for decades beyond its means by swapping treasury debt for Chinese manufactures would have been stopped dead in its tracks. At the end of the day, central banker palaver about the world’s alleged “savings glut” refers to nothing more than the inherent accounting identity in world trade. Mercantilist policy makers which choose to swap the sweat of their workers brows (China and east Asia) and the bounty of nature buried in their energy and mineral resources (the petro-states) for paper IOU’s end up with current account surpluses; the net issuers of these paper debts accumulate the net deficits. It has nothing whatsoever to do with too much savings from real incomes. It’s a consequence of the rampant money printing that has saddled the world economy with $225 trillion of unrepayable debt and massive excess production capacity that will result in deflationary pressures and low-growth for years to come. Indeed, central bankers has wandered so deep into the rabbit hole of monetary crankery that they no longer even know the difference between honest savings from household incomes, business profits and government surpluses and fiat credits generated ex nihilo by central banks and the financial institutions which they enable. Accordingly, the global economy has been saddled with a historically aberrational run of malinvestment and surplus CapEx that at length has now triggered an sweeping global deflation and collapse of profits in the primary industries and capital goods. Stated differently, lunatic levels of CapEx in China and its supply train satellites during the last two decades was not a function of workers coming out of the rice paddies in their hundreds of millions and saving too much from the 60 cents per hour they were paid in wages. Instead, the economic insanity displayed in the chart below is on central bankers and their $20 trillion emission of fiat credit over this period.
And that gets us to the end game mendacity of Bernanke, Yellen and most especially Draghi. This blithering fool answered the valid German complaints about his savage war on European savers with this gem:
“In a world where real returns are low everywhere, there is simply not enough demand for capital elsewhere in the world to absorb that excess saving without declining returns,” Mr Draghi said……In such an environment, low central bank interest rates were not the enemy, but exactly what was needed to boost demand for investment….If central banks did not do this, investing would be unattractive,” Mr Draghi said. “So the economy would stay in recession.
What absolute tommyrot. If there is “not enough demand for capital” than why has the ECB scarfed-up $1 trillion of government and business debt during the last 14 months? Yes, the world is likely to face a CapEx depression during the years ahead owing to the massive overhang of excess capacity that has result from the cheap credit boom of the last two decades. But that baleful conditions was caused by central bankers. Now, no imaginable amount of zero cost credit will generate productive investments in the face of that profit-killing overhang. So the Big Lie about the savings glut is especially heinous. Central bankers are using it as a pretext to brutally punish savers for the consequences of their epic errors.