Kimball Corson — A Note on Liquidity Preference

Short summary of the liquidity trap.

Wandering the Oceans: SailBlogs
A Note on Liquidity Preference
Kimball Corson

Nick Bunker — Preparing for retirement when there’s a savings glut

Saving is all the rage — as problem. What to do?

WCEG — The Equitablog
Preparing for retirement when there’s a savings glut
Nick Bunker

Lars P. Syll — The Bernanke-Summers imbroglio

As no one interested in macroeconomics has failed to notice, Ben Bernanke is having a debate with Larry Summers on what’s behind the slow recovery of growth rates since the financial crisis of 2007.

To Bernanke it’s basically a question of a savings glut.

To Summers it’s basically a question of a secular decline in the level of investment.
To me the debate is actually a non-starter, since they both rely on a loanable funds theory and a Wicksellian notion of a “natural” rate of interest — ideas that have been known to be dead wrong for at least 80 years …

Lars P. Syll’s Blog
The Bernanke-Summers imbroglio
Lars P. Syll | Professor, Malmo University

Claudio Borio — The international monetary and financial system: its Achilles heel and what to do about it

Free download

This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the "excess financial elasticity" of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets - the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.

BIS
The international monetary and financial system: its Achilles heel and what to do about it
by Claudio Borio
Working Papers No 456
September 2014

Michael Pettis — Why Increasing Savings Does Not Bring Wealth

Debate about the global savings glut hypothesis is mired in confusion, a fundamental one of which is the seemingly obvious but false claim that a global savings glut must lead to higher global savings. Here, for example, is a recent piece by one of my favorite economists, Barry Eichengreen: 

There is only one problem: the data show little evidence of a savings glut. Since 1980, global savings have fluctuated between 22% and 24% of world GDP, with little tendency to trend up or down.

As surprising as it might sound, global savings gluts do not result in higher global savings except under specific, often unlikely, conditions.

What is a savings glut?

There is no formal definition, but whenever market conditions or policy distortions cause the savings rate in one part of the economy to rise excessively (itself an ambiguous word), we can speak of a savings glut. There are at least two main causes of a savings glut. 

1. A rise in income inequality. We see this in Europe, the US, China, and indeed in much of the world. As wealthy households increase their share of total income, and because they tend to save a larger share of their income than do ordinary households, rising income inequality forces up the savings rate. 

2. A decline in the household share of GDP. We’ve seen this mainly in China and Germany over the past fifteen years. When countries implement policies that intentionally or unintentionally force down the household share of GDP (usually to increase their international competitiveness) they also automatically force down the consumption share of GDP. Because savings is defined as GDP minus consumption, forcing down the consumption share forces up the savings share. There are many policies and conditions that do this, and I discuss these extensively in my book, The Great Rebalancing, but the main ones are low wage growth relative to productivity, financial repression, and an undervalued currency. 

Notice that in both these cases, and completely contrary to the popular narrative that praises high savings as a consequence of household thrift, and so as morally virtuous, the rise in the savings rate does not occur because ordinary households have become thriftier. In the former case household savings rise simply because the rich increase their share of total income. In the latter case national savings rise without households in the aggregate increasing their savings....

Quotes Marriner Eccles, too.

EconMatters
Why Increasing Savings Does Not Bring Wealth
Michael Pettis | Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University

Dean Baker — "Savings Glut" Means Much of Economics Is WRONG

Dean Baker presents an account of saving and demand leakage that is in agreement with MMT.

CEPR — Beat the Press
"Savings Glut" Means Much of Economics Is WRONG
Dean Baker

Stephanie comments:

written by Stephanie Kelton, August 03, 2013 10:09 
Hi Dean, 

Saving is just another way of saying "demand leakage". Only those with a loanable funds/Say's Law view of the world see it as anything else. Unfortunately, Krugman appears to be stuck in the latter camp. He gets insufficient AD only under exceptional (short-run) conditions, currently his zero lower bound Liquidity Trap argument. This is why he can write a piece titled "The Price is Wrong" and assert that the lack of insufficient aggregate demand is due to the failure of a single price -- the real interest rate -- to adjust to its market clearing level. 

Absent the ZLB problem, you end up in a Say's Law world, which Krugman is committed to defending: 

"So why do AS-AD? First, you do want a quick introduction to the notion that supply shocks and demand shocks are different, that 1979-80 and 2008-2009 are different kinds of slump, and AS-AD gets you to that notion in a quick and dirty, back of the envelope way. 

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." 

http://krugman.blogs.nytimes.com/2013/06/02/a-sad-story-i-mean-as-ad-story-wonkish

Dean Baker replies:

Krugman still believes that the economy tends to full employment
written by Dean, August 03, 2013 1:52 
Stephanie, 

i think you're right that Krugman considers the current downturn an exception because of the ZLB. In more normal times he would say that we can count on declines in the interest rate to move the economy quickly (fast enough not to need fiscal policy) to full employment.