Paul Kedrosky quotes David Rosenberg today on the implications of a rising savings rate:
The savings rate is going to be forced higher. This, again, is going to be very, very disinflationary. It means that fashions are going to change. It means frugality is going to set in. We’re going to be living in smaller houses, driving smaller cars and living more frugally.
David Roche, weirdly, comes to the same conclusion from the opposite premise. While Rosenberg says that disinflation is back with a vengeance, Roche says it’s dead. Yet he agrees on the return of frugality:
Disinflation is dead! The twin decades of disinflation brought many economic benefits but it was also characterised by the replacement of thrift by leverage in many economies, most notably in the major Anglo-Saxon ones. Now we shall see thrift replace leverage. This has multiple impacts. US living standards will be lower. Consumers worldwide will discover value rather than luxury shopping – it’s a Wal-Mart world rather than a luxury branded goods one.
In the long term, this is all good. America’s negative savings rates are unsustainable, so it’s good that they start rising, especially as capital-exporting countries in Asia start to develop greater capacity to invest in themselves rather than abroad. What’s more, there’s good credit and there’s bad credit. Good credit is invested wisely and results in economic growth; bad credit is simply consumed, spent on unproductive assets like houses and flat-screen TVs, and doesn’t fund the means by which it will be repaid. As consumers curtail their borrowing and increase their saving, that will free up the banks’ precious capital to fuel growth-oriented commerce. As Roche notes:
The financial sector will never be able to grow credit at five times the rate of GDP again… Banks are going to have to rely much more on traditional funding of assets by old-style deposits than over the past 10 years.
Given that, it’s just as well that those old-style deposits are going to be rising.