Do Average Citizens Know More Than Their Leaders? (July 7, 2005)
The latest issue of BusinessWeek features yet another article fingering the global savings glut as the cause of all the global imbalances I have discussed at length (What this Country Needs Is a...Good Recession). If it is true that average workers around the world have accumulated $11 trillion in savings, and are adding $1 trillion or so every year, then we can reach several conclusions:
How do we know they're investing their savings in bank accounts and real estate? As the article states, it's estimated that 80% of all available global savings is flowing into U.S. Treasury bonds (and we need to sell a lot of them to fund our huge deficits). If ordinary citizens were buying stocks, their banks wouldn't have so much money laying around to invest in U.S. Treasuries. As for real estate, the evidence is overwhelming that a global real estate bubble is in place. Up to a third of all new home sales in the U.S. are being made to investors; the historical average is less than 10%.
So why are average citizens avoiding "risky" investments like stocks and new businesses in their own countries? Perhaps for the simple reason that they're scared. Scared of what? Of financial crises which could rob them of their savings, and of a meltdown in all flavors of financial assets. Ironically, this mass desire for the "safety" of real estate has created a global bubble of epic proportions (see "Bubble? What Bubble?") which will eventually pop, devastating real estate assets around the world.
Despite the assurances of their leaders that all is well with the global economy--and on the surface, people are doing well enough to save enormous sums of money--the savers of the world are voting with their feet, so to speak, against financial risk. They are acting as if they expected a financial crisis in the near future--spending little, saving like crazy, avoiding risk, and buying "hard assets" or low-risk bonds.
People around the world have learned the hard way to anticipate financial crises on a regular basis--crises which leads to the devaluation of their savings or the shriveling of their economies. Perhaps it is only we in the U.S. who are so confident in the future that we blithely spend rather than save. But it is noteworthy-- and maybe even a bit chilling--that U.S. corporations are acting more like foreign savers than U.S. consumers. U.S. companies are not investing much in new R&D and new plant, or hiring new workers, as you would if you expected good times ahead; they're amassing huge piles of cash--savings by any name--to the tune of $550 billion.
If there is wisdom in crowds, then we should all be afraid, for the crowds of global savers are socking away money as if they fear a terrible financial storm is brewing on the horizon.
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