Stephen Roach says look at the real nature of the US savings-short economy to understand why 'momentum' won't carry it far, and why a tariff wall won't help

By Stephen Roach*

The spin is all too predictable.

With the US stock market clawing its way back from the sharp correction of early February, the mindless mantra of the great bull market has returned. The recent correction is now being characterised as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate.

After all, the argument goes, economic fundamentals – not just in the United States, but worldwide – haven’t been this good in a long, long time.

But are the fundamentals really that sound?

For a US economy that has a razor-thin cushion of saving, nothing could be further from the truth. America’s net national saving rate – the sum of saving by businesses, households, and the government sector – stood at just 2.1% of national income in the third quarter of 2017. That is only one-third the 6.3% average that prevailed in the final three decades of the twentieth century.

It is important to think about saving in “net” terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity. Net saving represents today’s investment in the future, and the bottom line for America is that it is saving next to nothing.

Alas, the story doesn’t end there. To finance consumption and growth, the US borrows surplus saving from abroad to compensate for the domestic shortfall. All that borrowing implies a large balance-of-payments deficit with the rest of the world, which spawns an equally large trade deficit. While President Donald Trump’s administration is hardly responsible for this sad state of affairs, its policies are about to make a tough situation far worse.

Under the guise of tax reform, late last year Trump signed legislation that will increase the federal budget deficit by $1.5 trillion over the next decade. And now the US Congress, in its infinite wisdom, has upped the ante by another $300 billion in the latest deal to avert a government shutdown. Never mind that deficit spending makes no sense when the economy is nearing full employment: this sharp widening of the federal deficit is enough, by itself, to push the already-low net national saving rate toward zero. And it’s not just the government’s red ink that is so troublesome. The personal saving rate fell to 2.4% of disposable (after-tax) income in December 2017, the lowest in 12 years and only about a quarter of the 9.3% average that prevailed over the final three decades of the twentieth century.

As domestic saving plunges, the US has two options – a reduction in investment and the economic growth it supports, or increased borrowing of surplus saving from abroad. Over the past 35 years, America has consistently opted for the latter, running balance-of-payments deficits every year since 1982 (with a minor exception in 1991, reflecting foreign contributions for US military expenses in the Gulf War). With these deficits, of course, come equally chronic trade deficits with a broad cross-section of America’s foreign partners. Astonishingly, in 2017, the US ran trade deficits with 102 countries.

The multilateral foreign-trade deficits of a saving-short US economy set the stage for perhaps the most egregious policy blunder being committed by the Trump administration: a shift toward protectionism. Further compression of an already-weak domestic saving position spells growing current-account and trade deficits – a fundamental axiom of macroeconomics that the US never seems to appreciate.

Attempting to solve a multilateral imbalance with bilateral tariffs directed mainly at China, such as those just imposed on solar panels and washing machines in January, doesn’t add up. And, given the growing likelihood of additional trade barriers – as suggested by the US Commerce Department’s recent recommendations of high tariffs on aluminum and steel – the combination of protectionism and ever-widening trade imbalances becomes all the more problematic for a US economy set to become even more dependent on foreign capital.

Far from sound, the fundamentals of a saving-short US economy look shakier than ever.

Lacking a cushion of solid support from income generation, the lack of saving also leaves the US far more beholden to fickle asset markets than might otherwise be the case. That’s especially true of American consumers who have relied on appreciation of equity holdings and home values to support over-extended lifestyles. It is also the case for the US Federal Reserve, which has turned to unconventional monetary policies to support the real economy via so-called wealth effects. And, of course, foreign investors are acutely sensitive to relative returns on assets – the US versus other markets – as well as the translation of those returns into their home currencies.

Driven by the momentum of trends in employment, industrial production, consumer sentiment, and corporate earnings, the case for sound fundamentals plays like a broken record during periods of financial market volatility.

But momentum and fundamentals are two very different things.

Momentum can be fleeting, especially for a saving-short US economy that is consuming the seed corn of future prosperity.

With dysfunctional policies pointing to a further compression of saving in the years ahead, the myth of sound US fundamentals has never rung more hollow.

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2018, published here with permission.

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This article reinforces the importance of domestic savings as a necessary requirement of banking. some commentators on this site have tried to argue in the past that banks actually do not need domestic saving s from Joe Public, but would prefer to jut borrow funds from over seas. While that may be their preference, the reality is any and all savings by workers, business and Governments is fundamentally vital to a Banks function, and ultimately the economy.

Thus any manipulation, or policy failure that removes the ability for people to save and preserve their earned wealth (for example allowing wages to be negotiated down, reducing surplus disposable income, or alternatively allowing banks to claim "ownership" of savings deposits that will become threatened in times of economic turmoil) can only result in a long term damaging impact on economies.

I agree, but the RBNZ's monetary policy and weak regulation of bank lending practice provide a huge disincentive for people to save.

How so?
For the depositor/investor, the EV of non backed deposits over the long term is almost surely not different to that of backed deposits.
I cannot see how you people think there is an arbitrage is backing bank deposits.

I think you are starting to get a real issue of "comment now, think later".

I don't think anyone here with half a brain advocates for a lower domestic savings rate, long term.
I fail to see how this article even hints at that reinforcing the importance of domestic savings as a necessary requirement of banking..
That is not the point that is being made - Perhaps a look at the most fundamental macroeconomic equation of GDP might provide an understanding of this.

Thus any manipulation, or policy failure that removes the ability for people to save and preserve their earned wealth (for example allowing wages to be negotiated down, reducing surplus disposable income, or alternatively allowing banks to claim "ownership" of savings deposits that will become threatened in times of economic turmoil) can only result in a long term damaging impact on economies.

1 - Funny how wage negotiation has been a pivotal part of wealth generation in any economy smart enough to employ a free market doctrine.
2 - Name a policy in any economy (in a non socialist utopia of your dreams) that has been designed to systematically reduce surplus disposable income.
3 - You still cannot grasp this notion that whenever you receive a return on capital, it is indicative of some intrinsic risk. That's the idea of investing. Again, look at what defines a healthy economy - it isn't a lack of liquidity in the lending market.

Nymad, Your failure is that you argue that people placing money in a bank as "investing". for the vast majority of people it is NOT. They put it in a bank because, as discussed the other day, they put it there for safe keeping. Interest is of course a bonus, and they generally do understand that the banks use it while they have it, thus the reason for it. But they do not generally realise that once in the bank it is no longer "theirs".

And successive Governments have actively encouraged our country to become a "low wage" economy, supporting businesses to drive wage costs down (industrial relations laws). An easy solution to help cut costs and improve "productivity". Crusher Collins even touted on national media about National's policy to allow lifestyle flexibility that in reality meant many people had to work multiple minimum wage jobs just to make ends meet. This was part of an overall process of the "freemarket economy" that actively drove wages down. Indeed for the last 30 years it has been acknowledged that wages have not kept pace with inflation, only the upper fairly small percentile, growing while everyone else lost ground. This erosion leads to less disposable income available for saving to be eroded over time. Was this 'actively or systematically" designed to reduce disposable income. Probably not, but the legislators who put these systems in place are expected to understand the consequences of their policies.

Successive Governments have abrogated their responsibilities towards their constituents in so many ways, that the combination effects have been very damaging, while the rich just get richer. Some examples; Teachers needing a 36% pay rise to bring their pay back to the levels of 30 years ago (yesterday news on TV1), muti-national corporates paying tax in NZ, The ISDS provisions in the TPP when Australia for example doesn't have them, industrial relations laws removing the balance of power between workers and employers.

Nymad, referring to the "productivity" comment - take a look the Roger Witherspoon's excellent comment in today's 90 Secs.

Seeing as we have a different brand of logic - do tell what you mean by this comment.

I just don't see how your implied mandated increases in wage costs will make things better.
It just shows a fundamental misunderstanding of economics.

I don't deny things have become relatively worse for some people.
One thing I do know is that it will only become worse if you attack the fundamentals of globalised free market economics.

What are the " fundamentals of globalised free market economics."?

Surely it is unchanged from any free market system - The efficient allocation of scarce resources.

Talk about the meaning of 'Free Market" - free from what , regulation, manipulation, influences.

This is where our fundamental differences lie. Power players endeavour to manipulate the system to their advantage. any efforts to regulate elicits the howls of outrage and calling foul! A true free market system is only possible when all the players are equal - equal in their resources, ability to negotiate, understanding and knowledge. Such a situation does not, and I suggest, cannot ever exist. Worker do not have power equal to employers when negotiating wages, NZ does not have the same power as Australia or the US when negotiating trade deals. thus a true "free Market" cannot in reality ever exist, so regulation must be in place to manage and limit the market. Governments have a fundamental responsibility to protect their constituents, and legislative failures have led to declining living standards, a housing crisis and so on. Rose coloured glasses on idealist theologians and complex arguements cannot gloss over the failings of a free market economy which isn't.

Too funny, it's not Friday is it?
If you really believe that, your blinkers have formed into a blindfold.

What are these scarce resources you speak of? How is efficiency measured - time, price, fulfillment of society's/individual needs?

What's more efficient - 5 people building a house or 2, 1 person doing a 12 hour shift or 2 people doing a 6 hour shift each?

The allocation of resources to those who can afford them according to who can make the most money from them. Doesn't mean it's the most efficient or best allocation of resources.

There has never been a free market system and it's never been about the efficient allocation of scarce resources. It's only ever been about greed for more monetary wealth.

Surely it is unchanged from any free market system - The efficient allocation of scarce resources.

nymad.. I don't think that is the case with Globalisation/global trade. ie.. it is not as simple as that.
In fact it does not necessarily even apply to all free mkts.

The "tragedy of the commons " is an example that comes to mind.

In the context of Global trade the idea of a mercantilist economy comes to mind

I would argue that Chinas' controlled monetary system is a tool/form of mercantilism.

just my view

What are the " fundamentals of globalised free market economics."?

AJ... I think that is a great question..
Globalists parrot the idea of comparative advantage and efficient allocation of resources, as being reson enuf to promote Global free trade... but I don't accept those as being good reasons, in themselves.

The truth is , globally we are not "one tribe".. We are many tribes with a history of Nationalism and conflict.
What might be percieved as the "common good" for one tribe might be perceived as, for example, a currency war by another...etc..
I even perceive Multi nationals as, kinda, being a tribe of their own.

1 globalisation , competition from low wage countries . ie, filipino workers in our dairy industry.

2 increased government spending/ regulation coupled with globalisation.

3 are deposits investments? Deflationary forces of are gathering.

1 - Interesting. As you know, andrew, wealth is productivity - right? How can long run wealth me maximised if there is an input output imbalance.

2 - That's not a policy.

3 - I don't see the point in the deflation comment - Portfolios don't cease to be investments when they experience a period of negative growth.

3, that would depend on debt levels?

2 high government regulation and increased spending has been government policy.

2 - How exactly is that designed to systematically reduce the overall welfare?
Maybe in the long term, but it isn't a short term intended consequence. My point being - these are policies of unintended consequence (the whole two targets, one tool economics conundrum). They are not policy with the specific directive of reducing wealth.

Well it impacts my business, when you have globalised forces to compete with and you are an exporter, it's not a long trip over the edge.

If you look say at dairy, costs were manageable but rising fast especially capital costs, so a lot of investment went offshore to places like Chile until land prices there reached an equilibrium of sorts. Thats not going to happen in Russia, too much land too much potential.

So we end up an expensive place, with lots of inequality caused by increased asset wealth due to low interest rates and an expectation of future inflation, record amounts of debt, because prices always go up and a lot of older savers not getting market priced returns on saving that reflect risk.

And no one wanting to invest in productive assets due to poor returns and lots of regulation

I agree wholeheartedly.
That is exactly what has happened.

Again, it's a policy of unintended consequence though. None of these original policies had the primary directive of reducing wealth.
Bad, bad, bad long term. But, again, that's the targets thing.

We need some kind of rationalisation in the dairy industry, not going to be easy. Russia is aiming at self-sufficiency sooner rather than later in dairy. Putins implementation of low cost loans has been extraordinarily successful, Ag in Russia is going from strength to strength, Ten dollars invested is giving 50 dollar returns when we invest 10 dollars and get 9 back. We have become very dependent on China which is risky and a big change from the UK and EU of old, countries that played cricket.

Leadership is lacking in the farming industry. One of the major hurdles is debt and how to restructure marginal land away from dairy. A lot of land in NZ now carries high costs in areas that are non discretionary like rates, my 250 acres has 6k of local rates and 2k of regional council rates, up from a few hundred dollars when I purchased the place in 2000.
So do we rationalise those costs too, built on the back of high capital values? We have lost most of our advantage over producers in other countries, the EU has lifted dairy production, the equivalent to a %6 increase in US production and the US is up %2.7 last year too, more gains expected this year. Why is production going up when prices are down? I would hazard a guess at cash profits being better than nothing.

"The corn belts of the world are expanding, too. Monsanto is working to develop what it hopes will be North America’s fastest-maturing corn, a variety that matures in 70 days, which will be perfectly suited to northern climates such as Western Canada and Ukraine.

Monsanto projects that Western Canadian corn plantings could multiply 20 times to 10 million acres by 2025, adding 1 billion bushels, or nearly 3%, to current global production. Soybeans also are spreading across Canada, with farmers having seeded a record-high 7.3 million acres in 2017, up 75% over the last five years."

According to Warren Buffett himself:

In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high

.As Buffett himself wrote in the annual report,

In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.

... he invests in the same way that Cantabrians drive their cars ... never pausing at the yellow light ...barreling full steam ahead ....only slowing down when it hits red ...

I'd love to hear a summary of the A2 milk company by the great Warren ... ... that would stop a few rabid fans in their tracks ...

Think 10 years down the track when we are all A2.

Then it will become just another agricultural commodity and unable to continue to extract a premium.

As Buffett has stated: " Companies selling commodity like products should come with a consumer wealth warning - Caution: Competition can be injurious to human wealth "

The management of A2 have done an absolutely superb job and shown up Fonterra in the process but as Buffet has stated - What I simply cannot get people to understand is the difference between a good business and a good investment. When I bought Coke at $ 6 it was a great company and a great investment. Today its $ 54 - It's still a great company - but alas it is no longer a great investment "

There goes ATM. Crazy to think its worth nearly 1.3 times Auckland Airport.

So how do we measure up against other countries...hmmmmm....curiously we are similar to the USA, so perhaps our glorious future is to be caught between a rock and a hard place.


The way I see it:

1/ savings is basically deferred consumption. ( For me , this is the most first principle definition of savings )

2/ The so-called "global savings glut" , is actually vastly excessive credit creation , which is the antithesis of "saving". ie. It brings forward tomorrows consumption.

3/ this is the nature of the western worlds' current form of "debt capitalism".... In this world, "aggregate demand" is the most important thing... GDP growth is critical. ( If everyone started saving, we would have a recession ).. The irony is that it is DEBT that keeps the "debt capitalism " train moving..

It is a game of smoke and mirrors, that can go on for a long time... We borrow $60 billion, spend $55 billion and call the $5 billion left over , "savings".

USA is fortunate that it has the global reserve currency.. When a country like China is happy to take $US in exchange for products, and then , for some reason, want to hold 3 trillion $US as foreign reserves, some might think USA is getting a free lunch....for a while,... for quite a while..

I recall thinking in the early 1980s' that the $US was dooomed, as a consequence of Nixon doing away with Bretton Woods and imprudent money creation.... and yet 40yrs later the game is still going on.

The biggest lesson I've learnt in that time is that fiat money is NOT a store of value.


.. the Gnats showed us that the ultimate store of value is the natural resources ... which is why they stood idly by whilst them and their mates made out like bandits with escalating property prices, and free water for eternity to their friends and partners water bottling plants ... and no punishment for their rich dairy farming cronies who've done more to destroy our fresh waterways in a decade than previous European occupation of this country had achieved in 200 years ... not to mention the enormous belching of methane gas into our air ( they really out to have gagged Nick Smith ! ) ...

In the rawest sense savings are a surplus of food. The surplus facilitates people to be pulled from primary production to participate in other activity. That could be building project, an army, or an artist. The savings, the surplus, gives you options.

Today the method is to pledge future consumption, not to put some aside. It changes the impetus from projects you want to do, to a drive to increase production to meet the promises already made against that production. There is a loss of options.