There has been a savings glut for the last 20 years and it just got really bad this year.
Excess savings are simply dollars that are sitting around doing nothing, employing no one, investing into nothing. There are lots of sources of excess savings. Right now one of the fastest growing source is the house hold savings rate but for the last 20 years it was mostly foreign exchange reserves and corporate savings.
These excess savings are almost equivalent to a contraction of the monetary supply with the caveat that in theory they could come back at any time and nobody knows when, however it's been 20 years and no sign of stopping. The Fed is conservative and only increases the money supply in a mostly reversible way either by issuing debt or buying assets which are then put on its balance sheet. Debt must be paid back, eventually the money that was issued via debt disappears and only the interest payments is freshly minted, QE (buying assets) works under the assumption that inflation will cause asset prices to go up and therefore if the Fed sells assets it will end up with a profit and the returned money is then destroyed to contract the money supply.
However, interest rates aren't powerful enough to steer the economy. At some point they will hit the 0% lower bound. At 0% people will switch to cash and cash equivalents (usually treasury bonds) and therefore it becomes impossible to charge negative interest.
If 0% interest rates are not enough to force people to invest their money themselves then there must be a barrier that is impeding investments to be made. The total investment rate and the total savings rate are just convenient numbers that summarize an entire economy. Surely there must be a crucial piece of information missing that explains the discrepancy. E.g. the type of savings that is currently in abundance is incompatible with the type of investments that are possible and profitable.
As with all things in life this is merely something I am figuring out as I go.
My first clue is venture capital and the Softbank Vision fund. VCs are chasing unicorns simply because their huge scale of capital requires a huge scale of investments. Softbank doesn't even bother with anything less than $100 million. Surely there are startups out there that need $10 million in funding to get started and can double their money in 10 years but have no growth potential beyond say $30 million revenue per year. These companies would do productive work and employ people along the way and everything would be fine but they simply don't fit into the VC model. The most famous case of a over funded company I know is Juicero. I'm sure there would have been a way to keep it running even if it takes a dozen revisions to the original juicer, but at $120 million you knew it was going to shut down before it made any money.
Excess savings are simply dollars that are sitting around doing nothing, employing no one, investing into nothing. There are lots of sources of excess savings. Right now one of the fastest growing source is the house hold savings rate but for the last 20 years it was mostly foreign exchange reserves and corporate savings.
These excess savings are almost equivalent to a contraction of the monetary supply with the caveat that in theory they could come back at any time and nobody knows when, however it's been 20 years and no sign of stopping. The Fed is conservative and only increases the money supply in a mostly reversible way either by issuing debt or buying assets which are then put on its balance sheet. Debt must be paid back, eventually the money that was issued via debt disappears and only the interest payments is freshly minted, QE (buying assets) works under the assumption that inflation will cause asset prices to go up and therefore if the Fed sells assets it will end up with a profit and the returned money is then destroyed to contract the money supply.
However, interest rates aren't powerful enough to steer the economy. At some point they will hit the 0% lower bound. At 0% people will switch to cash and cash equivalents (usually treasury bonds) and therefore it becomes impossible to charge negative interest.
If 0% interest rates are not enough to force people to invest their money themselves then there must be a barrier that is impeding investments to be made. The total investment rate and the total savings rate are just convenient numbers that summarize an entire economy. Surely there must be a crucial piece of information missing that explains the discrepancy. E.g. the type of savings that is currently in abundance is incompatible with the type of investments that are possible and profitable.
As with all things in life this is merely something I am figuring out as I go.
My first clue is venture capital and the Softbank Vision fund. VCs are chasing unicorns simply because their huge scale of capital requires a huge scale of investments. Softbank doesn't even bother with anything less than $100 million. Surely there are startups out there that need $10 million in funding to get started and can double their money in 10 years but have no growth potential beyond say $30 million revenue per year. These companies would do productive work and employ people along the way and everything would be fine but they simply don't fit into the VC model. The most famous case of a over funded company I know is Juicero. I'm sure there would have been a way to keep it running even if it takes a dozen revisions to the original juicer, but at $120 million you knew it was going to shut down before it made any money.