Tuesday, March 3, 2015

The Global Savings Glut Explained

The savings we talk about when we talk about a "global savings glut"  (see, for instance, this article) are all in the form of IOUs, mainly as deposits and bonds. Any other type of savings could not be "searching for safe assets". And these safe assets, of which AAA/AA-rated bonds constitute the absolute majority, are just another type of IOU. There is, actually, one pure barter market in the world and that is the financial market where one type of IOU gets exchanged to another type of IOU only if there exists a "double coincidence of (credit, or IOU) wants". (Remember: deposits are IOUs.)

So, with our massive, global debt overhang, we must have a "savings glut". It is a matter of logic. These savings are just the flipside of the debt we have amassed. These savings are not a cause for lower interest rates and increased total debt -- they are the effect of lower interest rates and increased total debt. Naturally, we have reflexivity at play here, so that any "excess deposits" -- which came to being through increased bank lending -- are searching for willing borrowers. It's important to notice that these must be bond-issuing borrowers (government bonds, MBS, ABS, investment grade, high-yield, etc), as commercial banks do not lend existing deposits to their loan customers (as explained by Bank of England).

When the bond is issued by a commercial bank/financial institution (as in the case of MBSs/ABSs), then the transaction does not add to the total amount of IOUs in the economy: a deposit is just switched to a bond, i.e. the deposit disappears (see my second post for further details). But when the bond issuer is a non-financial business, the transaction adds to the total amount of IOUs in the economy. A new bond is created and the deposit changes its holder/owner, but does not disappear.

The important point to realize is that the excess deposits arise from increased commercial bank lending -- increasingly to households since the 1980s -- and this can be seen as the ultimate cause for our "savings glut".

If these excess deposits, created in the course of commercial bank lending, are taken as "money-as-a-commodity" -- and not correctly as "money-as-an-IOU" --, then we get fooled and start thinking that there is a lot of savings out there. And we view these IOUs as current ("real") wealth, incorrectly ("incorrectly" from a macroeconomic perspective, and this is the perspective we need to adopt here). As a consequence of this misunderstanding, everyone feels richer, for a while. This is what has happened during all credit bubbles we know of (see my sketch of credit boom dynamics).

Tell me where I go wrong? I really hope I do.


  1. Greetings from Sardonic (of FT comments section). Looking forward to more discussions here.

  2. Welcome to Clumsy Statements, Sardonic! ;-) Thanks for stopping by.

    I'm planning to write a more general post tonight -- let's see if I get it published today. I'll try to (re-)define money in it. You might find it interesting. We'll see!

    Anyway, feel free to browse my previous posts if you have time. Especially the ones (1st, 2nd and 3rd) about forgetting what you once thought was money.