As I discussed yesterday, policy makers and influential “thinkers” are openly considering government purchases of equities and corporate bonds. On Friday Bloomberg published an article titled, “Summers Floats Idea of Sustained Government Stock Purchases.” From the article, “Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation.” The article continued, “To the extent that low neutral rates are in part the consequence of investors preferring fixed-income assets and steering clear of riskier options, policy makers can combat that by buying risk assets he said.” And finally Summers said, “In a world where cutting-edge technology companies are awash with excess cash, it can hardly be a surprise that there is substantial downwards pressure on the level of real interest rates.”
While I believe his comments on the purchase of stocks and corporate bonds are important, today I wanted to focus on his statement regarding “low neutral rates” and “companies are awash with excess cash.” In effect, Summers is hinting at a savings glut. The savings glut argument has been used by several policy makers, including Ben Bernanke, as an explanation of why interest rates are so low. This line of reasoning has never made sense to me.
If there is a savings glut, why has total global debt increased from $142 trillion in 2007 to $199 trillion in 2014 (source: McKinsey)? Global debt to GDP has grown from 269% to 286% during the same period. In the United States, why has government debt doubled this cycle to near $20 trillion? Why is corporate leverage (outside of a few mega caps) higher this cycle than last cycle? Why are there serious pension issues even with assets prices near record highs? Why does the average American not have sufficient savings? Why have student and auto loans soared over $1 trillion this cycle? I could go on and on.
Is it possible there isn’t a savings glut, but instead a glut in central bank intervention? Over the past eight years, the major central banks have purchased $12 trillion in stocks and bonds. If the central banks sold all of their recently purchased assets, promised to never QE again, and allowed interest rates to float, I believe we would be in a better position to determine if a savings glut exists. Assuming QE was reversed and outlawed, I believe stock and bond prices would decline meaningfully. Just the hint of a 25bps increase in the fed funds rate causes investors to panic. Imagine what would happen if QE was abolished and there was a complete central bank balance sheet exit, or full liquidation. I suspect the savings glut theory would disappear as quickly as the bids on the assets central banks were attempting to sell.
Global savings glut?