Thinks savings are soaring from fiscal stimulus handouts? From what perspective?

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I will discuss that chart in a bit, first let's play a thought game.

Thought Game Conditions

• The Government pays a NYSE listed corporation a $1 trillion to build a bridge
• Money Supply rises by $1 trillion
• The expected life of the bridge is 30 years.
• Via increased economic activity and tax collection the government will collect $250 billion (the government will lose $750 billion).
• The builder pays employees $700 billion and records a $300 billion profit paid out as dividends. 
• The employees spend $630 billion and save $70 billion.
• Assume interest is zero and there is no time preference or time value of money.

Q: What is the True Net Savings?

New Conditions 

• The first day in service a terrorist blows up the bridge or an act of God destroys it. 
• The bridge is worthless. Moreover there are now $100 billion in cleanup costs. 

Q: What is the True Net Savings Now?

True Savings 

From a personal point of view the dividend recipients saved $300 billion and the employees saved another $70 billion.

The dividend recipients made out like bandits but even more so did the corporate executives who undoubtedly got huge bonuses and stock options. Hooray!

But where did the money come from?

Taking government into consideration, the true net saving in my example is $-750 billion (given the assumption that a dollar recovered 30 years form now is as good as a dollar today). 

But the distribution is hardly equal. Some people pocketed money and taxpayers will have to fund the rest to the actual tune of $1 trillion and wait as long as 30 years to get only $250 billion back. 

My condition of zero interest and zero time value would not happen in real life, so the true burden on taxpayers would be well over $750 billion. 

And when the bridge comes tumbling down, tack on another $250 billion that the government will not get back in increased tax collection then another $100 billion for cleanup costs making the net savings $-1.1 trillion.

Yet, from a personal standpoint there is an additional $1.1 trillion sloshing around as M2 and personal savings in the bank. 

Total  Credit Market Debt Owed

Total credit market debt owed is $85.9 trillion!

That number comes from the Fed. 

How much of that can possibly be paid back?

Savings Glut?!

Former Fed chair Ben Bernanke says interest rates are so low because of Part 3: The Global Savings Glut. 

...My conclusion was that a global excess of desired saving over desired investment, emanating in large part from China and other Asian emerging market economies and oil producers like Saudi Arabia, was a major reason for low global interest rates. I argued that the flow of global saving into the United States helped to explain the “conundrum” (to use Alan Greenspan’s term) of persistently low longer-term interest rates in the mid-2000’s while the Fed was raising short-term rates. 

The idea is of course preposterous. Bernanke confuses monetary printing and financial speculation with saving.

What is Saving?

Saving = Production - Consumption 

Here's a classical example. A farmer producers 100 bushels of wheat. He eats 10 of them and saves 90. But wheat rots. So he sells those 90 bushels for dollars. Those dollars are now his saving. 

Personal Savings

Take a look at the lead chart. 

The three spikes are three rounds of COVID stimulus, the first under Trump and the second two spikes under Biden.

This money was handed out willy-nilly.

What was produced? The answer of course is nothing. 

Negative Saving

If nothing was produced, there can be no "net" saving. And most of that money has now been spent. 

Ah, but what about the bill?

Yes, thanks to the handouts there are trillions of dollars of negative savings added to the US debt stockpile that someone has to pay back. 

We spent (borrowed from the future) what we never produced. That is net negative saving. 

This discussion does not imply the government should have stood back and done nothing at all, but the stimulus checks were not targeted and the third was total overkill, with consequences.

Consider Military Spending

The US spends hundreds of billions of dollars every year on military equipment.

At least the government (taxpayer) gets something, sort of.

When a bomb is dropped, the saving (bombs) are consumed. But the debt (and M2 sloshing around) remains. 

The same thing happens to military equipment. It becomes obsolete over time. 

Wheat rots, equipment gets obsolete. Both are forms of consumption.

If the spending was truly for defense, we would get something for our money. Unfortunately, we unwisely use taxpayer money (negative savings) to be the world's policeman.

And what about Vietnam, Syria, Iraq, Afghanistan? 

That is totally unproductive debt that keeps piling up. And don't forget interest on the debt.

What About GDP?

Let's consider debt through the eyes of GDP with a spotlight on China and the developer Evergrande (EGRNF).

According to the New York Times, Evergrande has more than $300 billion in financial obligations, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. Things got so bad that the company paid its overdue bills with unfinished properties and asked employees to lend it money.

A few days ago Evergrande was ordered to tear down some of those buildings. 

All of this activity added to GDP. Money spent tearing down the structures will add to GDP as well.

Is this ridiculous? Of course it is. 

Realistically, not just because of Evergrande, Chinese GDP is way overstated. In practice however, the malinvestment will come at the expense of future GDP. 

The same applies to the US.. And this is why it takes increasing amounts of money to goose GDP at all. 

The law of diminishing returns has kicked in. The marginal impact of more debt decreases over time. 

What About Inflation?

Those three rounds of stimulus in the US combined with QE forcing interest rates lower when they should have gone the other way produced a nasty bout of inflation.

Speculation is running rampant in stocks, houses, Bitcoin, NFTs, and even zombie companies via junk bonds. 

A zombie company is one unable to cover debt servicing costs from current profits over an extended period. The Fed has kept them alive with low interest rates. 

What is the True Net Savings in the US?

I have no idea. Nor does anyone else. 

The Fed has so distorted money supply and there is so much debt and financial speculation it is impossible to say what portion of total credit can actually be paid back (i.e. productive vs unproductive debt). 

But talk of a savings glut is absurd. We also know the Fed blew another massive bubble.

Financial Crisis Coming

In June of 2017, then Fed Chair Janet Yellen proclaimed I Don't See a Financial Crisis Occurring 'In Our Lifetimes'.

Even if we let the COVID pandemic slide as a non-crisis, these debt levels ensure another global financial crisis is coming.

Meanwhile, the Fed is trying to undo its damage with a hawkish FOMC meeting. 

For discussion, please see The Bond Market Reacted to Hawkish Fed Meeting Minutes Days In Advance: Why?

Lots of words were spilled today in over the Fed's allegedly hawkish FOMC meeting minutes. Let's go over several things no one else seems to have caught.

It's far too late for the Fed to stop the now inevitable crash. Yet, there still no way to time the event. 

However, expect the outcome to be a deflationary crash not hyperinflation. That's what happens when debt bubbles implode. And this is the biggest debt bubble in history.

Thanks for Tuning In!