SAVINGS WON'T SAVE THEM (via Jim Yates):

Too Much Money: A global savings glut is good for growth -- but risks are mounting (Rich Miller With Jack Ewing in Frankfurt, Stanley Reed and Laura Cohn in London, Frederik Balfour in Hong Kong, David Henry in New York, and bureau reports, 7/11/05, Business Week)

Savings. It's an almost mystical word for economists -- the Holy Grail of growth. The more a country saves, the more it has available to invest. And the more it invests -- in computers, factories, or infrastructure -- the more productive its economy becomes and the faster it can grow. [...]

[S]urprising events are forcing economists, investors, and policymakers to think more globally than ever before. In just the past few months, they've begun to consider seriously two intertwined and heretical notions: What really matters for interest rates is the global economy, and there the problem may be too much savings, rather than too little.

Look around the world, and extra money is piling up in all sorts of places. Japanese corporations are recording record profits, but not doing much spending. Chinese companies are on an investment tear, but the country is getting so much money from exports that it has billions to spare, including $18.5 billion that China National Offshore Oil Corp. (CNOOC) bid for Unocal. The surge in oil prices -- now about $60 a barrel -- is giving oil-producing countries such as Russia and Saudi Arabia far more money than they can use right away. And the aging workers of Europe are building nest eggs for an uncertain future.

The International Monetary Fund predicts that in 2005 the worldwide savings rate should hit its highest level in at least two decades. Surprisingly, even in the profligate U.S., businesses have been accumulating huge sums as undistributed corporate profits -- running at a record annual rate of $542 billion in the first quarter -- have almost doubled in the past two years. This corporate hoarding explains why the U.S. national savings rate, which includes governments and businesses as well as households, rose to 14.7% of national income in the first quarter, up from 12.8% two years ago.

This unexpected surge of savings is like a rose with thorns. Low interest rates have the potential to power productivity, build wealth, and raise living standards throughout the world. As more and more workers in developing countries join the global economy, cheap money makes it easier to provide the equipment and infrastructure they need to prosper. Access to global savings has also enabled the U.S. private and public sectors to fund a big increase in housing construction and health-care spending in recent years, while simultaneously ramping up military outlays. The result: guns and butter -- all without boosting inflation or pushing up interest rates.

But the savings glut is creating new risks for the global economy, which is having a tough time absorbing the unanticipated flood of funds. Instead of going into productive investments, cheap money may be overheating spending and sending asset prices soaring too high, setting the stage for a future bust. "The odds of a catastrophic scenario have gone up," says Kenneth S. Rogoff, former chief economist at the IMF and a professor at Harvard University.

Those gluts will get consumed quickly as the elderly are forced to pay for their own exorbitant social welfare benefits in countries facing population/taxpayer decline and as their property values collapse because there are no people to live in the houses. But for Americans, with a uniquely growing population and economy, the global deflation and reforms like privatized SS and HSAs mean there's no end to the savings in sight. You think people hate us now? Watch as the economic divide accelerates.

Posted by Orrin Judd at July 1, 2005 7:39 PM