Reverse in the savings decline?
Martin Feldstein, writing in Foreign Affairs, predicts "the return of saving" in the US. Brad Delong has the relevant excerpts:
Share prices are not likely to double again in the next decade, nor will housing prices continue to rise at double-digit rates. Accordingly, households will be able to increase their wealth for retirement and other purposes only by reducing the growth of their spending so that it is less than the growth of their after-tax incomes -- that is, by saving more. Most important, mortgage interest rates have stopped falling, bringing an end to the dissaving that occurred when homeowners simultaneously reduced their monthly mortgage payments and extracted massive amounts of cash simply by refinancing their mortgages. This suggests that there will be a relatively rapid rise in the savings rate.
This is also interesting:
The flow of funds to the United States should be a matter of concern not only because it has increased so rapidly but also because those funds now come in what may prove to be a much less sustainable form. In the late 1990s, most of the capital that flowed into the United States came in the form of equity investment by private investors.... Today, the capital inflows to the United States primarily go toward purchasing bonds and making bank deposits, including very sizable deposits by foreign governments at the Federal Reserve.... The available data do not distinguish between purchases by banks on behalf of private investors and purchases by banks on behalf of foreign governments. But extensive conversations with officials and private bankers suggest that an overwhelming share of the foreign capital inflows in recent years has come from foreign governments...
Since governments do not make investment decisions by simply balancing risk and return the way private investors do, it is particularly difficult to anticipate their future behavior. How long will foreign governments want to keep running large current account surpluses and investing those surpluses in relatively low-yield foreign bonds? And how will they respond to developments in the United States or in the global economy in the future? These unanswerable questions add to the overall uncertainty of the global economic outlook...
What's interesting to me is that Feldstein, logically, thinks household saving will be stimulated by a negative wealth effect, since in the future just holding a stock of housing and shares in mutual funds without adding to it out of current income will no longer adequately increase a household's wealth during the asset-accumulating part of the lifecycle. (This effect would presumably be partially offset by the incentive to substitute away from less lucritive saving toward current consumption, but not enough to cancel out the wealth effect.)
But if a negative wealth effect triggers greater saving and reduces current consumption, shouldn't we also worry that the positive wealth effect of say, giving the US millionaire lobby large new or continued tax breaks on their current investments will in fact have a negative (or at least closer to neutral) effect on their overall saving? Especially since taking advantage of the particular provision on Roth IRAs entails a sharp tax-hike in the short run as the money transfered between types of IRA becomes subject to income tax.
Share prices are not likely to double again in the next decade, nor will housing prices continue to rise at double-digit rates. Accordingly, households will be able to increase their wealth for retirement and other purposes only by reducing the growth of their spending so that it is less than the growth of their after-tax incomes -- that is, by saving more. Most important, mortgage interest rates have stopped falling, bringing an end to the dissaving that occurred when homeowners simultaneously reduced their monthly mortgage payments and extracted massive amounts of cash simply by refinancing their mortgages. This suggests that there will be a relatively rapid rise in the savings rate.
This is also interesting:
The flow of funds to the United States should be a matter of concern not only because it has increased so rapidly but also because those funds now come in what may prove to be a much less sustainable form. In the late 1990s, most of the capital that flowed into the United States came in the form of equity investment by private investors.... Today, the capital inflows to the United States primarily go toward purchasing bonds and making bank deposits, including very sizable deposits by foreign governments at the Federal Reserve.... The available data do not distinguish between purchases by banks on behalf of private investors and purchases by banks on behalf of foreign governments. But extensive conversations with officials and private bankers suggest that an overwhelming share of the foreign capital inflows in recent years has come from foreign governments...
Since governments do not make investment decisions by simply balancing risk and return the way private investors do, it is particularly difficult to anticipate their future behavior. How long will foreign governments want to keep running large current account surpluses and investing those surpluses in relatively low-yield foreign bonds? And how will they respond to developments in the United States or in the global economy in the future? These unanswerable questions add to the overall uncertainty of the global economic outlook...
What's interesting to me is that Feldstein, logically, thinks household saving will be stimulated by a negative wealth effect, since in the future just holding a stock of housing and shares in mutual funds without adding to it out of current income will no longer adequately increase a household's wealth during the asset-accumulating part of the lifecycle. (This effect would presumably be partially offset by the incentive to substitute away from less lucritive saving toward current consumption, but not enough to cancel out the wealth effect.)
But if a negative wealth effect triggers greater saving and reduces current consumption, shouldn't we also worry that the positive wealth effect of say, giving the US millionaire lobby large new or continued tax breaks on their current investments will in fact have a negative (or at least closer to neutral) effect on their overall saving? Especially since taking advantage of the particular provision on Roth IRAs entails a sharp tax-hike in the short run as the money transfered between types of IRA becomes subject to income tax.
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