INTEGRAL ECONOMICS

Saving Ourselves
Daniel O'Connor | Integral Ventures, LLC

The unsustainable decline in household saving rates has

its origin in the monetary policies of the United States and
some of its trading partners.
Saving Ourselves

Daniel O'Connor | Integral Ventures, LLC

Developed economies around the world are in the

midst of a steady slide in household saving rates
the pace and correlation of which may very well be
unprecedented. A recent article in The Economist
discussed this shift away from thrift:1
IT MAY be a virtue, but in much of the rich
world thrift has become unfashionable.
Household saving rates in many OECD
countries have fallen sharply in recent
years. Anglo-Saxon countries — America,
Canada, Britain, Australia and New Zealand
— have the lowest rates of household
saving. Americans on average, save less
than 1% of their after-tax income today
compared with 7% at the beginning of the
1990s. In Australia and New Zealand
personal saving rates are negative as
people borrow to consume more than they
earn. These shifts raise important questions. Are
people saving too little? What are the
consequences of falling saving rates?
Should governments try to encourage
people to save more, and if so, how?
What's interesting about these questions and the
many answers floated by The Economist is the way
they skirt the essential question of why people are
saving so little. Granted, attributing causality to
selected factors within a complex dynamic system
of interrelated factors is always difficult and
controversial. Depending upon where we begin our
chain of logic, it often seems as though one factor's
cause is but another factor's effect, with no clear
driving forces within the overall web of mutual
causality. Such is the market economy.

I think we can look to our central

Other countries with rapidly greying
populations—especially Japan and Italy—
have also seen their personal saving rates
plummet, though from a higher level. The
Japanese today save 5% of their household
income, compared with 15% in the early
1990s. A few rich countries, notably France
and Germany, have bucked the trend away
from thrift. Germans saved around 11% of
their after-tax income in 2004, up slightly
from the mid-1980s.
banks and their profligate monetary
policies for much of the answer to
the essential question of why
people are saving so little.
Nevertheless, as I presented in Stable Instability2
and as common sense confirms, we do not live in a
pure market economy. Not even close. Moreover,
even though self-organizing markets can generate
clear trends that reflect the gradual evolution of the
value functions of market participants, I think the
best place to start the inquiry into such trends as
the saving decline is with the state's deliberate
attempts to promote the appearance of economic
growth. Cutting to the chase, I think we can look to
our central banks and their profligate monetary

Page 1
policies for much of the answer to the essential These lower-than-market costs of capital have
question of why people are saving so little. resulted in higher-than-market rates of appreciation
in the prices of many assets—e.g., stocks, bonds,
Generally speaking, as central banks use the policy
houses—which are often touted by government
techniques at their disposal—setting discount rates
economists as the increasing savings balances that
for central bank lending to banks, setting reserve
more than offset any downside associated with the
requirements for banks' lending to households and
decreasing saving rates. In other words, as long as
businesses, engaging in open market purchases of
wealthier householders see the value of their
government bonds, and shaping people's percep-
houses, stocks, bonds, and others assets rising,
tions of monetary policy and economic performance
even in the absence of any new saving, then all
—to promote economic growth, they create new
householders as a group are considered to be
alignments of key economic factors that would not
relatively secure.
otherwise exist and cannot be sustained forever.
Overall, with more consumption and more invest-
For example, in recent years, the Federal Reserve's
ment, both funded with increasing degrees of
inflationary monetary policy of lower short-term
leverage, we are seeing rates of US economic
interest rates and lower reserve requirements for
growth that are higher than what they would have
commercial lending has been met by similarly
been absent the monetary policy interventions.
inflationary policies of some other central banks
Further-more, US economic growth appears to be
who, in order to support their respective export
increasing all the more so because of the growth in
sectors, have attempted to stem the dollar's natural
deficit-spending by the federal government, which
depreciation in relation to their own currencies by
has been fueled by lower interest rates for its own
aggressively purchasing US Treasury securities. The
debt obligations as well as the seamless monetiza-
combination of these two opposing state inter-
tion of its budget deficits as a critical component of
ventions has produced lower-than-market interest
the Federal Reserve's inflationary monetary policy.
rates which, in turn, have created valuable incent-
ives for households to save less, borrow more, and Such is the basic argument for the use of monetary
consume more. To the extent that the value and fiscal policies—increases in the supply of money
functions among householders have remained rela- and credit and increases in deficit-financed govern-
tively stable, we can be sure that hundreds of ment spending—to drive economic growth, parti-
millions of people have indeed saved less, borrowed cularly in the midst of recession. So much the
more, and consumed more than they would have if better if the US government can get foreign central
the central banks had maintained policy neutrality. banks to play along with them because of the US
dollar's unique status as the leading global reserve
currency.
The critical weakness in this
proto-global-Keynesian policy, is
that it relies on the distortion of
market prices—the observable,
measureable results of past market
decisions—in order to incent market
participants to make future market
decisions that they would not
have made if they could have
based these decisions on
valid market prices.

At the same time, the central banks' inflationary

monetary policies have resulted in lower-than-
market costs of capital for businesses, which have
therefore tended to raise more equity, borrow more
debt, save more cash, and invest more in capital
goods than they otherwise would have in the
absence of these policies. We might also add home
construction to this category of investment, whose
production certainly seems to have increased as a
result of the lower-than-market mortgage rates
offered to builders and homeowners and the higher- The critical weakness in this proto-global-Keynesian
than-market prices of mortgage-backed securities. policy, it seems to me, is that it relies on the

Page 2
distortion of market prices—the observable,
measureable results of past market decisions—in
order to incent market participants to make future
market decisions that they would not have made if
they could have based these decisions on valid
market prices. Thus, as the diagram above
suggests, state interventions in the market can,
through the distortion of market prices, undermine
market participants' efforts to make reasonable
decisions consistent with their value functions and
to learn from their market experiences in order to
make even better decisions in the future. Such
market learning is the key to surviving and thriving
in the market economy.3
If we do not fundamentally alter our
value functions to conform to this
perverse alignment of factors
whereby we seem to be able to
consume our cake and save it too,
then it is only a matter of time
before our real value functions
more fully manifest in the prices
throughout the market.
How does this dysfunctional tug-of-war between
state learning and market learning manifest in the
economy?
In a mountain of debt, growing faster than the
economy itself.
Why debt?
Because when central banks bid interest rates down
below their market levels, encouraging excess
consumption, discouraging necessary saving, and
encouraging excess investment, they create a
shortage in the supply of funds relative to the
demand for funds that can only be bridged through
Daniel O'Connor is the managing director of Integral
Ventures, a strategy consultancy committed to foster-
ing more innovative and sustainable ways of doing
business. He has been a pioneer in the development of
integral praxis in business and economics, having
authored numerous articles and essays in this
emerging field.
email: daniel@integralventures.com
website: www.integralventures.com
Page 3
the extension of credit and concurrent creation of
money. This extension of credit and the accumu-
lation of debt over time is the process by which
central banks create the appearance of economic
growth greater than, and different from, what
would have occurred absent the inflationary
monetary policy.
So what?
Well, if we do not fundamentally alter our value
functions—our preferences, expectations, biases,
and heuristics, our values and assumptions about
what is true, good, and beautiful in this life—to
conform to this perverse alignment of factors
whereby we seem to be able to consume our cake
and save it too, then it is only a matter of time
before our real value functions more fully manifest
in the prices throughout the market. What will be
for some an intentional re-alignment of market
values, actions, and results will be for others a
series of interrelated financial crises of unknown
origin and uncertain outcome. The process will be
far from enjoyable for most, but in learning again
how to save ourselves, we can move toward a path
of more sustainable economic development.
This April 2005 work is licensed under a Creative Commons
Attribution-Noncommercial-No Derivative Works 3.0 License.
1
The Economist. (2005). “The Economics of Saving.” The
Economist. April 7, 2005. http://www.economist.com/finance/
displayStory.cfm?story_id=3839554. Retrieved April 12, 2005.
2
Daniel O'Connor. (2005). “Stable Instability.” Catallaxis.
http://www.catallaxis.com/2005/02/stable_instabil.html.
Retrieved April 12, 2005.
3
Daniel O'Connor. (2003). “A Crisis of Vision: Toward a More
Integral Economics.” Catallaxis. http://www.catallaxis.com/
2005/02/a_crisis_of_vis_1.html. Retrieved April 12, 2005.
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