Interesting anti-Fed link from an economist: http://www.forbes.com/columnists/forbes/2008/0505/108.html He writes: "Harvard professor Martin Feldstein, for example, argues that the bilateral trade balance between the U.S. and China is determined by the yuan-dollar exchange rate. Accordingly, to reduce China's trade surplus with the U.S., he advocates an appreciating yuan. This advice is nonsense. Trade balances are determined by national savings propensities, not exchange rates. China's savings surplus and America's savings deficiency largely determine our trade imbalance with China. The U.S. Treasury should have learned this lesson after years of forcing the Japanese to adopt an ever appreciating yen, which destabilized Japan's economy without doing a lick of good for trade balances. Until the Fed dumps inflation targeting and the U.S. abandons its weak-dollar policy, inflation will rule the day. Retain (and add to) your gold hedges." What "savings propensity" is he talking about? Does he mean the fact that we save little cuzz we have articially low, Fed-induced interest rates? If so, isn't that an odd way to state it? Why not just say, "The US has low interest rates so investors are less likely to invest there?" Any explanation would be much appreciated...
"Low" interest rates can encourage borrowing and stimulate economic activity, not saving. Banks want people to take on debt. Does that make any sense?
What they're referring to is that with low interest rates, people tend not to save. Yes, it's great for economic activity because borrowing is cheap. But it's the opposite with saving: a lot of people say, "Why bother to save when I'm only going to get 3%?" And, of course, they're not balls-to-the-wall traders like us here on ET earning double digit earnings monthly... But what I'm asking is that savings seems secondary and, unless I'm missing something which is entirely possible, not a direct issue but rather a fallout of the low int rates.
1) You're only making double-digit returns each month?.......Okay. 2) But seriously, regarding savings, here are some "shades of gray" to consider. Lower-income people don't save because they spend nearly all of their income for necessities. 3) Many people of greater means still spend all they earn merely to enjoy a "better" lifestyle. For them, saving is something that can be taken care of later in the future. 4) Many people of greater means already "save money" via retirement & brokerage accounts that aren't taken into consideration when calculating the national savings rate. 5) Higher savings rates seem to be indicative of pessimism and the lack of a consumer-driven society. People save/hoard money, regardless of the level of interest rates, because there's nothing to spend it on.
Your points are well-taken. But here's my question: isn't it the interest rate level that matters directly. How much people save is really an indirect factor, right?
?.....No. People save money when they can or when they have to. The prevailing trend or level of interest rates is irrelevant.