"The precautionary behavior of every entity in the global economy has gone up," Mohamed El-Arian, CEO of bond-investment fund PIMCO. "We've gone from an age of entitlement to an age of thrift."
This has been a recurring theme from the bond fund giant, yet you wonder what is actually being said when fiscal spending is going through the roof through deficit financing and the use of the Fed balance sheet. Thrift or savings comes from a number of sources within the economy. These include consumers, corporations through retained earnings, and governments who run surpluses. The consumer savings were depleted or reported to be close to zero, but this is partially due to the fact that we do not count investment in educations as savings. Consumption also was high because of the wealth effect. The increase in wealth from a strong stock market and the cash out of home equity all helped to increase consumption. On the other hand, corporations have in many cases increased their cash hoard. Governments including the US Federal were cutting deficits for most of the 1990's. These savings declined during the last recession through counter-cyclical policies as expected.
So now we are in 2009 and savings have actually increased substantially for consumers. This is in response to the decrease in overall wealth. The Keynesian paradox of thrift is that if consumers all save more the economy will do worse, so the only alternative is to have dissavings from non-consumers, the government. There has been a significant increase in government dissavings to offset the behavior of consumers. The public domain has taken the place of the private domain for spending. If the public domain increases spending and it is not an investment with a return, then the private domain has to save to offset the future taxes that will have o be levied on the consumer. Is this an "Age of Thrift"?
This could be the end of the "Age of Leverage". It could be the end of the "Age of Wealth"? It could be an end of the "Age of the Consumer" or the "Age of New Government", but thrift may have nothing to do with this.
This has been a recurring theme from the bond fund giant, yet you wonder what is actually being said when fiscal spending is going through the roof through deficit financing and the use of the Fed balance sheet. Thrift or savings comes from a number of sources within the economy. These include consumers, corporations through retained earnings, and governments who run surpluses. The consumer savings were depleted or reported to be close to zero, but this is partially due to the fact that we do not count investment in educations as savings. Consumption also was high because of the wealth effect. The increase in wealth from a strong stock market and the cash out of home equity all helped to increase consumption. On the other hand, corporations have in many cases increased their cash hoard. Governments including the US Federal were cutting deficits for most of the 1990's. These savings declined during the last recession through counter-cyclical policies as expected.
So now we are in 2009 and savings have actually increased substantially for consumers. This is in response to the decrease in overall wealth. The Keynesian paradox of thrift is that if consumers all save more the economy will do worse, so the only alternative is to have dissavings from non-consumers, the government. There has been a significant increase in government dissavings to offset the behavior of consumers. The public domain has taken the place of the private domain for spending. If the public domain increases spending and it is not an investment with a return, then the private domain has to save to offset the future taxes that will have o be levied on the consumer. Is this an "Age of Thrift"?
This could be the end of the "Age of Leverage". It could be the end of the "Age of Wealth"? It could be an end of the "Age of the Consumer" or the "Age of New Government", but thrift may have nothing to do with this.
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