We are presently building up conflicts within the asset price frame:
Conflicts between asset values and GDP flows and their growth rates;
Between asset prices and return expectations;
Between human capital values and the distribution of those values and their impact on the overall wealth equation with respect to future consumption risks as well as asset pricing via increased asset focus of flows due to distribution dynamics;
Within portfolio structure and relative to the liquidity and capital security dynamics of liability streams.
All of this tied to the relationship between frame transitions, emergent properties and structural imbalances and unconventional monetary policy focused overly on asset price support.
As of Q4 2015 the household savings rate was some 4%, down from 15% as of the early 1990s:
But the data hides a starker reality: disposable income less household expenditure in Q4 2015 left a savings rate of 0.5%. The 4% savings rate is actually made up for the most part of a pension adjustment, a factor which has held relatively stable. Not much room here for increasing expenditure.
Indeed we see a big drop in savings ex pension adjustment from 1993 onwards, matched by a large increase in consumer credit and a further deeper plunge from 2002 to 2008, matched again by consumer credit. I cannot find stat data from Stats Canada or the Bank of Canada on HELOCs which would provide further information on influences on household expenditure (secured home equity lines of credit being far cheaper than unsecured consumer credit) but the consumer credit data seems to coincide quite well with the drop in savings rates:
Household and NPO debt relative to GDP continues to rise:
For me the “Savings Glut” Hypothesis falls down on a number of key areas:
The first and most important is that it appears to ignore significant loan/monetary growth which breaks the point in time National Income Identity on which “Savings Glut” arguments apparently rest. I say apparently because much of the discourse supporting the SG hypothesis is either couched in nuanced semantic surfing and/or bereft of argument that you can trace directly back to the source of the flows from which they derive savings. Many supporters of the SG hypothesis either ignore these monetary dynamics totally or disavow them without cause.
The second is that it ignores the foreign exchange and central bank monetary dynamics involved in much of the FX/asset purchases. Key components of the trade balance/net investment position were orchestrated by Central banks creating new money to buy dollars and thence assets.
The third is that it ignores the fact that the major mega surplus economy, China, was and remains to a very large extent driven by loan financed (new money) gross fixed capital investment. Again the basic National Income Identity model misses a myriad of inter temporal dynamics. The SG argument was that it was excess savings and not monetary and financial system excess that caused the crisis and to fully understand the imbalances you have to look at where National Income/output is derived.
The fourth is that it ignores the very important development of emerging Asia as a global production hub and the off shoring dynamics that saw significant components of US and other international manufacturers move tranches of their manufacturing base to these countries. This issue is well covered and documented.
Finally, as discussed in numerous papers, focussing only on the net investment flows ignores vast sources of excess demand for assets that were also instrumental in pushing financial markets out of synchonisation with their economic fundamentals.
I will look to explore and illustrate these arguments in coming posts.
Inflationary dynamics have brought about a large relative increase in real incomes over the last six months or so.
Yes it looks as if much of the most recent improvement has not been “spent”, but it is only 1 or 2 months into this gap which must itself be set against strained income increases over the last decade. Longer trends and frames remain important for the sustained growth rates over time and the current frame remains a weak one. Personal consumption expenditures as a % of disposable income remain at historically high levels and consumer credit growth may also be a notably factor weighing against leeway for growth in consumption (see end of post).
Low savings rates, high levels of consumption relative to income and a heightened dependence on current transfers for income growth looks to be a poor frame for consumption growth. Too much reliance is being placed on “auto loans” and a steady if unspectacular growth in employment.
US consumer debt has been growing at a reasonable pace, and non revolving debt particularly so. In fact if we relate annual average growth in non revolving debt to growth in personal disposable income (using 3 year rolling averages) we find that non revolving credit growth is at historically high levels relative to income growth.
It is an interesting point. You can get a localised bubble without credit/debt expansion and this is where consumption demand and/or asset focussed demand plonks itself overly on one particular sector of economic activity or asset class. This would draw resources/demand away from other asset classes or other economic sectors. But it would show up in relative demand for other asset classes and other areas of demand. In other words some areas would deflate and others would expand. The damage as the bubble burst would be due to misallocation of resources, if this impacted capital and human investment allocations, or merely a revaluation of asset classes.
The US economy lies somewhere between boom and bust as shown by the following graphical representation of real GDP growth. Nevertheless, there are aspects of US economic growth that have boom type characteristics/risks; these are found primarily in the significant increases in auto focussed consumer credit and automotive production/capacity
Short term data has varied wildly of late; such can often obscure the underlying trend: what if we adjust for inventories and changes in consumer credit? Well we see less noise for one, but we also see a slower underlying growth profile – yes, credit creation is part and parcel of growing expenditure but I still feel we are in a high debt/deleveraging and weak income growth dynamic that needs to be especially sensitive to growth in credit/debt.
Regulators’ views of capital market efficiency are framed on the past, a past where high costs and crude suitability standards did not ostensibly materially impact saving’s ability to fund both consumption and capital investment dynamics. To make the transition we need lower transaction and structural costs and more sophisticated processes. This is a dynamic which will make an impact on savings, asset prices and returns, and possible fundamentally impact consumer confidence.