Friday, August 4, 2017
ALBERT EDWARDS: The same problems that caused the financial crisis are back
The savings rates in the US and the UK are dropping, and economists are trying to figure out what that means.
When the US government released its annual revisions to economic growth last week, it made sharp downward revisions to the personal saving rate. Savings as a share of disposable income was 4.9% last year, not 5.7% as earlier calculated, the Bureau of Economic Analysis said.
The update showed that incomes were less than previously reported, while consumption was higher.
Albert Edwards, a Societe Generale strategist and permabear, published the doomsday interpretation of this data in a note on Thursday. For Edwards, it's the eve of the financial crisis all over again.
"Every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today," he said.
Slumping savings rates in the US and the UK were last seen in 2007, "just before the bursting debt bubble blew the global economy and financial system to smithereens."
Edwards assigned the blame to the Federal Reserve. Quantitative easing, which stoked demand for bonds and other debt assets, "has not only inflated corporate debt to grotesque levels, but finally the US savings rate has responded to the surge in household paper wealth that QE has produced," Edwards said.
He continued: "Typically the SR always declines (shown as a rise in the chart below) with rising wealth. Why do you need to bother saving if interest rates are close to zero and house and stock prices are rising?"
The risks from a low saving rate are two sided, said Mickey Levy, the chief economist for Americas and Asia at Berenberg Capital Markets. "It suggests that consumers are confident enough to increase their spending relative to income growth but it also means that consumers have less of a buffer in the case of any adverse shock."
However, Neil Dutta, the head of US economics at Renaissance Macro Research, said the savings rate is "basically where it should be when taking household wealth relative to income into account."
And so, even if the lower savings rate reflects another credit binge, as Edwards argues, more consumer spending is keeping the US economy afloat for now.