The Reserve Bank of Australia’s recent claims regarding our savings habits are intriguing. Conventionally-defined household savings (disposable income less consumption less depreciation) has become negative in Australia in recent years – close to the lowest observed among countries like the US, Britain and Italy. However if savings is redefined to include both superannuation and the accumulation of stock market wealth, our savings rate has virtually doubled over the past few years and, at 24% of disposable income, is among the highest of any developed economy.
Moreover the RBA suggest that the increase in wealth is not an ephemeral phantom that reflects an illusory stock market boom since the increase in stock market prices is well-justified by increased company earnings. Note also the strong savings performance of the US in these same terms – it outforms even Australia. Presumably both economies are now revealled to have good potential to deal effectively with population aging issues. But why are both countries running such huge current account deficits – I thought these reflected inadequate savings – as Ben Bernanke states ‘That inadequate U.S. national saving is the source of the current account deficit must be true at some level; indeed, the statement is almost a tautology’.
Update: Access Economics has criticised high levels of government spending as a $35 billion bet on an unending continuation of the commodities boom (Commonwealth Budget Monitor, #69). The implication is that all such booms come to an end so it is an unsound bet so government should be more prudent. But, if this is so, then is not the RBA also gambling on a continuation of the boom in claiming that Australia’s savings rate is high? Even if equity prices have risen to reflect improved commodity prices, so P/E ratios are not high, the market will fall if commodity prices decline. Even if the current situation in the stock market does not correspond to a bubble, valuations can still be myopic. Then, if commodity prices do decline as the Treasurer says they will, households will experience capital losses and using the new measure, savings will fall.
There is a distinction between lodging savings in a bank and saving in the stock market because the latter is riskier and capital gains or losses are more important. To say that high capital gains offset increased foreign borrowing will not be true if capital gains on equity turn into losses. The distinction between old and new savings definitions hinges on the distinction between debt and equity contracts. This also means that the current account as a measure of our increasing indebtedness needs to be rethought.