Alot is being written about how the average savings rate for Americans has increased. But wait, all that savings is translated to increased availability of credit. A bank has to use the deposits you make in order to pay you interest. It can do this in several ways. First, it can use the deposits to buy back its own shares or another bank, in effect it borrows from its depositors. Second, it can lend this money out to borrowers, but this has become a declining activity. Third, it can use the funds to buy “securitized debt” which have become known as “toxic assets.” Fourth, it can buy public debt, i.e. Treasury bills or state and local government bonds. No matter what you call it, the increased savings rate simply increases the supply of credit.

The point here is that savings do not vanish from the economy, they are simply converted into more debt. So as much as one may consider an increased savings rate as a reduction in consumption, it is just a way of transferring the consumption to another actor in the economy, since the savings are used to lend money for consumption.

In looking at this I would also note the basic difference in how companies raise capital in the USA and other countries. Outside our borders the common practice is for companies to borrow from banks (those deposits made by people). It is such a critical point that one sees at the heart of all major Japanese conglomerates a bank. Mitsubishi Bank is at the heart of Mitsubishi Corporation and it lends to guess who, you got it, Mitsubishi’s various enterprises. In Europe all companies have a tight relationship with their bankers and banks usually receive a large share of a company’s shares in exchange for granting the company loans.

Not so in the USA. Companies here use the stock market to raise most of their capital. Thus the savings rate is not so important to corporate progress in the USA. But buying shares is, and that is why US companies continue to raise as much capital as they want, in spite of a traditionally low savings rate in the USA.

All of this, however, has been dramatically altered by the rapid growth of the “securitized debt” market. Now a major way for companies to raise funds, just like the property market, is to take loans and bundle them into bonds that are sold to investors. In essence we have combined the credit resource from deposits, with the stock market, to create what has proven to be a more dynamic and flexible source of financing for corporations.