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[Tokio 3]- At a US Senate Banking Commission hearing in late February, US Federal Reserve Chairman Powell said, “When we studied economics a long time ago, M2 (money supply and deposits)” The total of) and the money supply (in general) were thought to be related to economic growth, “he said.” Currently, M2 has no major implications. This knowledge must be forgotten. “He completely denied the relationship with rising inflation.
It is intuitively easy to understand that if the amount of money in circulation increases, the value per unit of currency will be damaged and prices in the real economy will rise, but the reality is not that simple.
This traditional understanding is based on the quantity theory of money, which regards price fluctuations as a monetary phenomenon, but reality has not moved with it. In this regard, I explained in detail in “The rapid increase in money in developed countries, the reason why it does not become an” inflation outbreak “” (delivered on September 29, 2020), so I will avoid repeating everything , but theoretically, the reason for having money is three things are assumed: 1) “transaction reason”, 2) “preliminary reason” and 3) “speculative reason”.
The not-so-small part of the increase in the demand for money (and thus the increase in M2) in the wreck of the crown is considered to be the money holding based on the preliminary motive of 2), in short, “savings for the future “. There may be more than one reason why President Powell said that M2 has no significant implications, but the idea that inflation concerns should not be raised unnecessarily in the face of increased motivated preliminary savings is presumed to be no small. .
This way of thinking about “savings” will be very important to the future prospects of the United States and the world economy. In the immediate aftermath of the impact of the crown in May last year, the author expressed concern in this column that “in the post-crown world, the rule that” it is better not to spend a lot of money will be strengthened. “He argued that This would be the case. They appear as an excess of savings in the domestic and business sectors (collectively referred to as the private sector) in the savings-investment balance (SI), which would be the main cause of the drop in prices and interest rates. changed a year later. Rather, it can be said that it has been strengthened.
Looking at the IS balance for Japan, the United States, and Europe in 2020, it is clear that the economy likely to contract due to “excessive savings in the private sector” was supported by “insufficient savings in the government sector (in short, mobilization fiscal) “. This is the composition in which Japan fell after the burst of the bubble, and it is expected that if it normalizes, prices will stagnate due to lack of demand and, as a consequence, interest rates will stabilize at a low level.
Zero central bank interest rates, low government bond yields, quantitative easing and slow prices are often cited as “symbols of Japanification” but are the result of “excess private sector saving” . It should be understood that the interest rate (also understood as the natural interest rate or the potential growth rate) that can sufficiently motivate consumption and investment is decreasing due to excessive saving.
As can be seen in the figure, the United States was the most clearly polarized in the three regions of Japan, the United States and Europe in 2020: “excessive savings in the private sector-insufficient savings in the government sector.” Speaking of the United States in 2020, a fiscal mobilization has been carried out on the scale of 20% of gross domestic product (GDP), and there is concern that the contents “cut the motivation to work and increase workers in the long term. “. Direct benefit measures, such as generous unemployment insurance, have attracted attention. It can be said that the establishment of the composition of “excessive savings in the private sector and insufficient savings in the government sector” is an inevitable consequence.
In contrast to the argument that excessive saving is the true cause of Japanification, there is also the argument that increasing savings is described as “magma” and is seen as a fuel that stimulates consumption and investment in post-corona . There is already an active debate in the United States about the risks that current policies lead to inflation, but behind this is a “mid-level concern about mixed expectations” that private sector savings could suddenly boost consumer activity. and investment.
In today’s US household sector, as a result of the crown’s support with cash benefits, income has soared more than consumption and the savings rate (savings / disposable income) has skyrocketed. The savings rate in January 2021 exceeded 20%, well above the 10-year average (January 2010-December 2019) just before the impact of the crown, which was 7%.
Given that the “consume more than income” behavior of households was the source of the strength of the US economy in peacetime, we can see the desire to describe this accumulation of savings as “magma.” This time, it is also a rapid increase in savings as a result of the artificial restriction of activities, so it is likely that these savings will be released and increase consumption and investment.
However, in the light of Japan’s experience, after the impact of the bursting of the economic bubble, the corporate sector lost its ability to take risks and the private sector as a whole intensified its excess savings. Specifically, in the 1990s, the business sector went from being a savings deficient entity to an excessive savings entity. This is believed to be the result of the loss of promising investment opportunities amid a drop in expected growth rates due to low demand after the burst of the economic bubble.
No, there must have been promising investment opportunities, so it would be better to say that the ability to discover investment opportunities or even if they were found, the ability to put them into practice had diminished in light of the financial and psychological conditions they were in. injured by the impact. It is right? In any case, it is well known that after the burst of the economic bubble, the growth rate has been chronically slow, prices have stopped rising, and monetary policy has fallen into a “liquidity trap”.
The euro area is following a similar path. About a year after experiencing the financial crisis associated with the Lehman shock in September 2008, the European debt crisis also occurred. Until around 2013, when the European debt crisis was no longer talked about in the financial markets, the political, economic and financial situation in the euro area suffered from carbon coating for four years. As a result, since September 2008, the euro area corporate sector has also become a savings glut, which has since become the norm.
Japan’s experience that “a strong shock changes business behavior” appears to have been amply demonstrated in the euro area. Although the debt crisis itself was almost resolved in 2013, wages and prices in the region remained low, and in June 2014, it decided to introduce negative interest rates before Japan. There were indications that the corporate sector would return to a savings shortage between the ages of 18 and 19, but the shock has returned it to a savings glut.
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Will the United States follow the same path as Japan and Europe? Or can the savings brilliantly revive like magma? Now I am at that tipping point. Unlike Japan and Europe, the United States has strong inflation expectations at the moment, and since it was able to raise interest rates several times even after the Lehman shock, it is tempting to wait for the conclusion that “savings were magma.”
It is difficult to predict the future in which “excessive savings in the private sector” in the United States will take hold and the phenomenon of Japanification will be perpetuated, and given the future of the world economy, I do not want that to happen. Regarding the IS balance in the United States, the household sector turned to excess saving after the subprime shock, and the corporate sector turned to excess saving after the Lehman shock. Since then, excess savings from the household sector has remained unchanged, but the corporate sector has once again run out of savings, showing signs of boosting the economy. With respect to the previous crisis, it seems that the vitality of the business sector has prevented the phenomenon of Japanification.
However, in 2020, the business sector is saving excessively again. The move in 20 years is force majeure, but can we go back to the savings shortage again in 21? It is important to consider the prices of immediate assets, but it is necessary to pay attention to such macroeconomic structural changes due to the unprecedented shock.
(This column was posted on the Reuters Forex Forum. It is based on my personal opinion).
* Daisuke Karakama is the Chief Market Economist at Mizuho Bank. After graduating from Keio University College of Economics in 2004, he joined the Japan Foreign Trade Organization (JETRO). He was attached to the Japan Center for Economic Research since 2006 and to the General Directorate of Economics and Finance (Belgium) of the European Commission since 2007. Since October 2008, Mizuho Corporate Bank (currently Mizuho Bank). When he was attached to the European Commission, he was the only Japanese economist involved in creating the economic outlook for the EU. His books include “European Risk: Japaneseization, Yenization, and Bank of Japan” (Toyo Keizai, July 2014), “ECB European Central Bank: From Organization, Strategy to Banking Supervision” (Toyo Keizai, November 2017) Moon ). Many appearances in media such as newspapers and television.
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