Savings, meanwhile, is on the march: personal saving rose to 5% in January. As Paul Krugman notes, that means that in the short run we can expect the economic contraction to continue, especially since banks aren't doing much to transform the savings into new investment (in part because businesses aren't much interested in investing in new productive capacity while demand is slumping). The personal savings rate isn't even particularly high right now by historical or international standards--something closer to 8-10% would be more in line with everything except very recent history.
There is a lot of talk about the paradox of thrift out there, including from Krugman. But just as I think the time has passed for attempting to cure the banking system's problems by pretending they'll get better if we just
Given that savings are probably going to increase to something closer to 10%, what does that mean for policy? Well, for starters, it has big implications for our predictions for stimulus multipliers. The money going directly to highly budget-constrained people will be spent--unemployment benefits, for example. But much of the rest of it will be saved because our marginal propensity to save just radically shifted.
Given you conclusion that the saving rate goes to 10% it still makes a massive difference whether it gets to 10% in 2010 or 2020.
MM writes: "at this point it seems to me that there is no realistic policy which can, or should, deter people from saving more of their income."
Why can't we just inflate the hell out of the currency? That would certainly deter me from saving.
I've asked this question over and over again on this blog, and nobody has given me a satisfactory explanation.
keep giving people money, rebates, tax cuts, whatever, until they have saved as much as they want and start to spend again.
simple.
your boy winterspeak is constantly screaming this message. how come never a link or two?
We will eventually inflate on a massive scale in order to counteract all this silly saving/paying down debt nonsense people are doing. If you won't spend it on consumption, the government will find someone who will.
If the banking system rights itself and people start spending their savings will it make things "better" more quickly? I have no idea, I send all my money to the MONEX lady in the gold lamé shirt.
Why can't we just inflate the hell out of the currency? That would certainly deter me from saving.
No it wouldn't it. It would just encourage you to transfer you savings from dollar denominated assets to gold or other commodity.
Nelson writes: "No it wouldn't it. It would just encourage you to transfer you savings from dollar denominated assets to gold or other commodity."
Thus precipitating a commodities bubble. Interesting... I think you just gave me an investment idea.
animal spirits....
if you heard this phrase for the first time, would you call an economist cure the problem?
Why can't we just inflate the hell out of the currency? That would certainly deter me from saving.
They can, and are working on it vigorously. Note the "stimulus" bill. Just takes a minute to show up in CPI.
Buy gold, and hope you can sell before USG appropriates it / bans trading.
Megan: "But just as I think the time has passed for attempting to cure the banking system's problems by pretending they'll get better if we just wish spend hard enough, at this point it seems to me that there is no realistic policy which can, or should, deter people from saving more of their income. It doesn't matter how much stimulus you pump into the system; overleveraged households still need to delever, because their previous level of leverage wasn't simply predicated on a belief that things wouldn't get worse; it rested on a belief that they would get *better*."
Bravo!
Of course, if this is the case, when you say the "time has passed" are you implying that there ever was a time when such policy would have worked? or that we tried and we learned that such policies are not and never were going to be effective?
Of course, the implication here is that there is not much you can do about a correction once it's required. But it points to the absolute importance of not adopting monetary policy (such as the "cheap money" policy of the 2001-2004 FED) which will bring on such bubbles.
Any economic system that is predicated on people living paycheck to paycheck for their entire lives is going to be wildly unstable and ultimately fucked. Why try to save it?
Everyone needs to calm down and roll with the much needed punches to get this country back on solid ground instead of spending trillions of bucks grasping at straws.
Megan,
You just proved to yourself why the stimulus is a good idea. A bunch of public spending money will in fact be spent and not saved. That is the whole idea of why paying for road work, bridge and school construction electric grid enhancement makes sense...as of course do the unemployment benefit measures etc.
Will you now give up on the conservative/libertarian delusion?
Wow, everybody is starting to sound like me. If this continues, I'll have to reverse strategies.
Um, I believe that this paragraph has something to do with the relative merits of tax cuts as part of the stimulus plan. Please don't let Mankiw know about this post.
Wow, everybody is starting to sound like me. If this continues, I'll have to reverse strategies.
I look forward to hearing from Bearded Spock, the Debt-Buying Monarchist.
Demand and prices inching up with newly minted cash, enter stagflation...
I could be saving one hell of a lot more money, but for the fact the the government takes 15.3% off the top to piss down a rathole.
"Demand and prices inching up with newly minted cash, enter stagflation..."
Stagflation is when demand stagnates and inflation rises - hence the name.
I don't see any anyone, company or individual, with the ability to raise prices in this economy.
I don't mess with Bearded Spock- Tantalus Device and all that.
"I don't see any anyone, company or individual, with the ability to raise prices in this economy."
I'm waiting for someone to explain the dynamics of scotch pricing. A bottle of Johnnie Walker Blue is now $184 at the local Costco (about $40 more at the regular liquor store). A few years ago, I remember it was $155. In addition, good single malts that used to be ~$50 per bottle (e.g., Oban) are now ~$70 per. I keep waiting for scotch to come down in price, given the recession combined with the decline of the British Pound relative to the dollar. No luck so far.
CW says that liquor is counter-cyclical, though in my case it only applies to Pabst.
Pabst? Even if money's tight, you can still find good beer at a cheap price. Try Yuengling.
I've heard the CW about liquor, but I didn't think it applied to higher-end scotch. Maybe it does though.
"I don't see any anyone, company or individual, with the ability to raise prices in this economy. "
The government is raising taxes, which are the prices of government services.
Dave,
All that scotch is caught in the liquidity trap.
That bit about Scotch reminds me of an observation I made about Guinness.
If you go to Costco and price it, you'll find that the price rarely moves more than a few cents per can. Here in godawfully-taxed Chicagoland it's always around $1.09 per 14.9 oz., plus or minus a bit.
This even when the pound swings wildly against the dollar.
I've been told by someone in a position to know that I can often buy it retail in the US for less then the cost ex taxes at the brewery gate in Dublin.
What the hell is going on there?
"If you go to Costco and price it, you'll find that the price rarely moves more than a few cents per can. Here in godawfully-taxed Chicagoland it's always around $1.09 per 14.9 oz., plus or minus a bit."
Cry me a river. At least you can buy it at Costco!
Then again, Pennsylvania's antiquated alcohol laws are probably the only things keeping the state from turning into Ohio, West Virginia, or New Jersey, so I'll shut up for now.
What the hell is going on there?
At least at the company I work for, we don't adjust international currency prices to account for the swings in the exchange rate. Distributors need to be able to forecast what to sell it to stores for, and stores need to be able to forecast based on the distributor price. This leads to sticky prices relative to the exchange rate.
"Cry me a river. At least you can buy it at Costco!"
Well, technically, we buy it from a store called "Western Beverages" that happens to be inside the Costco building but, unlike Costco, doesn't require a Costco membership card and takes credit cards. I assume it's owned by Costco and it's some sort of work-around due to liquor laws, but I don't know.
"Well, technically, we buy it from a store called "Western Beverages" that happens to be inside the Costco building but, unlike Costco, doesn't require a Costco membership card and takes credit cards. I assume it's owned by Costco and it's some sort of work-around due to liquor laws, but I don't know. "
Costco takes Amex. And Costco membership is one of the greatest bargains on earth. I save at least $1500 a year as a member. I buy a TON of stuff there and I track the savings.
The Costco Business Amex (anybody can be a business; just fake it) is free with membership and gives 5% cash back on gasoline. 3% back on restaurants. Plus "OPEN" discounts. Plus more.
Best money I spend every year. By far.
Johnny Walker Blue is a very special case. Some of the ingredients (Single malts) are no longer available. You can't make it any more.
It's less like a plasma TV, more like a Rembrandt. So the price will rise over time, forever.
But Lagavulin and Highland Park are still in production, so a falling pound should eventually result in lower prices. Or so I hope.
Any economic system that is predicated on people living paycheck to paycheck for their entire lives is going to be wildly unstable and ultimately fucked. Why try to save it?
Most economic systems throughout the history of the world have been predicated on people living paycheck to paycheck (harvest, hunt) for their entire lives. Yes they sucked, but they didn't all collapse.
"You just proved to yourself why the stimulus is a good idea."
Sssssh. It's not good form to point out to Megan that she's economically illiterate.
The federal government is a currency issuer. The only way we the currency users can save is if the government runs deficits. So the answer is simple, just run deficits until you've satisfied savings desire, at which point people will spend the rest of the money. Which is why the stimulus will work and its only problem was it was way too small.
Wouldn't people taking their money and putting it into saving accounts going to help banks' liquidity problems?
Isn't that a bit like second hand capital injection?
Send the stimulus to the spending classes. The Feds, for example, already have a list of everybody on food stamps, and with low incomes from the IRS. Send them a check a month for 12 months. Renew it in a year, as needed.
It'll knock the heck out of deflation. The only problem is that part of the multiplier goes off-shore. The three big spending items in this class are food, clothing and housing. Clothing goes off-shore pretty quickly, food is so-so, and housing stays in country. Interesting, that.