More Bubble Room

By Duru

July 4, 2005

"The International Monetary Fund predicts that in 2005 the worldwide savings rate should hit its highest level in at least two decades." ("Too Much Money" by various writers, BusinessWeek, July 11, 2005)

The above quote absolutely stunned me when I read it. I am so used to bemoaning the low savings rates and high debt levels in the U.S. that it never occurred to me that the world in aggregate could be saving at high rates. After all, the planet's largest economy is shopping every chance it gets. But even the U.S. national savings rate has increased over the past two years thanks to the wariness and newfound conservatism of corporate CFOs. We know that all this cash has found precious few places to rest with decent returns. The main hope for meaty gains has come from real estate (and perhaps gambling judging from the recent boom in internet gambling sites and massive poker tournaments on cable TV!). The BusinessWeek article argues that cheap money has also facilitated boosts in healthcare and military spending. The article does not specify the ultimate source of all these savings: the U.S. consumer. I can only assume that as the world's biggest spenders, Americans have obliged the coffers of the world's treasuries by purchasing the goods overflowing from the banks of foreign production. In fact, BusinessWeek quotes Harvard economist and professor Kenneth S. Rogoff as claiming: "[the] U.S. alone is soaking up as much as three-quarters of the excess global supply of savings." We are recycling these savings to further boost our debt-laden spending which then returns to Chinese and Japanese factories, Indian call centers and software shops, OPEC and Russian oil wells, perhaps Eastern European IT entrepreneurs, and certainly Iraqi and Afghan battlefields.

The BusinessWeek article expresses concern and worry over what might happen if this savings glut comes to an end. I think the more appropriate and immediate question might be to ask "where will the next bubble grow?" As the global economy has passed from one bubble to the next (the Japanese economic miracle, Southeast Asian tiger economies, global stock markets, and now global real estate markets), we should be getting a clue that this developing global economic system tells the drama of capital chasing one get rich quick scheme after another. Sure the latest bubbles have reached historic proportions relative to past bubbles in their relative asset classes, but I would think that a continued savings glut means that there still exists a large and capable audience of bubble blowers. These excess savings can continue driving current bubbles or start the next one. Essentially, there is still plenty of bubble room.

BusinessWeek is kind enough to provide the contrary opinion of economist James Paulsen, but even he is mainly worried about a rise in interest rates that will cause current bubbles to pop and spending to freeze up. He also predicts that rising inflation will quickly soak up all these luscious excess savings. On the other hand, the bond markets remain skeptical of longer-term inflationary pressures. The Fed claims it is fighting inflation now, and maybe they get things right this time. Regardless, if the Fed stops short in its "measured" rate of hikes for fear of causing the next recession, we will certainly be talking about a new bubble somewhere, somehow in the near future. In fact, the biggest irony is that a Fed tightening campaign that triggers a recession will only set the stage for the next cycle of rate cuts. These reductions may occur in full light of a savings glut exacerbated by the retrenchment that typically comes from economic recession. And who knows how fast the money will start flowing then, right?!?! Heck, maybe steel will even reflate!

If economy does have plenty of additional bubble room, I would prefer to have that discussion because I want to be the first one in the water this time! ;)

Be careful out there!

© DrDuru, 2005