Deflationary Savings

Deflationary Savings

The B-2 stealth bomber, Ben Bernanke wants the Fed to buy massive amounts of Treasury bills: for $ 500 billion for a start and may be up to $1 700 billion or more later on. His purpose is to boost the GDP growth and to prevent America from falling into deflation.

Mr. Bernanke makes a mistake in defining the cause of the present slow-down…

Excess of savings actually hampers GDP growth because of the hypertrophy of the monetary aggregate M2-M1 which actually amounts to 47% of GDP when the historical average fluctuates around 40%.

Click here to enlarge the chart.

As incomes rise and as American financial system have been perfected over the past half-century, the savings ratio should have continued to decline, as in the 90s: it fell to 32% of GDP in the first quarter 1995 and expected to be in the range of 20% at present time.

M2-M1 should amount to 30% of GDP ($14,578.7 billion) at the most, i.e. $4,400 billion against $7,000 billion at present.

$2,600 billion at least are then sterilized in the coffers of the savings banks in the U.S. when they should be recirculated into the economy. As most of the deposits can be withdrawn without notice, savings banks are obliged to keep excessive reserves for prudential reasons.

Good old Greenspan was right to encourage Americans to spend their dollars after causing a crisis (the Americans should lower their savings so that the GDP increases).

***

This is just an aspect of the quantity theory of money which is expressed as follows: GDP growth depends on the velocity of money (V).
V = GDP / M (3)

Or: GDP = V * M

Higher is the velocity of money V (i.e. more money M decreases), higher is GDP growth and vice versa.

But for me, I take into consideration the inverse ratio of the V quantity theory of money:  M / GDP.

As B-2 suppressed the publication of M3 figures, M2-M1 is relevant: lower are the savings (M2-M1), higher is GDP growth. It means that Americans reduce their savings to spend their dollars. So, demand restarts supply side, so GDP increases.

Better, I make this law as follows: the change in GDP is inversely proportional to the free monetary supply that is the difference between the change (in percentage) of money supply and (less) the rate of GDP growth (click here to read my article).

In this form it is clear that GDP increases when the money supply decreases, and more specifically when M2-M1 decreases, and vice versa.

The long face of B-2 who does not stop bemoaning the low GDP growth, is deflationary and very dangerous because it scares Americans. So they increase their precautionary savings that goes down demand and so GDP growth.

Unfortunately, it is not clear that Republicans having regained power in the midterm election have an opportunity to bring down the face of B-2.

B-2, among others, has rightly seen that the Great Depression was caused by the sterilization of a large part of the world money supply by France which has accumulated considerable reserves of gold in 20s, removing a huge amount of money that should have been in circulation worldwide.

Paradoxically, for the same reasons, it is the attitude of B-2 and his decisions which create (or extend) a crisis by not circulating money (sterilized M2-M1). So, the Fomc members maintain weak growth, which can degenerate into deflation. Another aspect of this problem: surpluses in the trade balances of Asian countries have not a deflationary effect.

As emerging markets are growing (which is inflationary), the crisis is not global but it affects first and especially the Americans ... who had the greatest wrong to vote for Democrats!
It's simple, everything is simple...

***