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The Bank of Japan started a two-day monetary policy meeting on April 9 - Monday.

The Bank of Japan ( BOJ) had raised rates to 0.5% from 0.25% in Feb’07.

No policy change is expected at the meeting, as recent softness in prices indicates that the BOJ’s next monetary tightening could be delayed.

other related links :

1. Japan - Bank of Japan’s (BOJ) Bank Rate since 1985 (on a monthly basis)
2. Japan - Consumer Price Index (CPI) continues its drops into negative territory in Feb’07
3. Japan - Producer Price Index (PPI) annual growth rate drops in Feb’07 (effects interest rate outlook)
4. Japan - GDP growth stronger in Q4 2006

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The following series of reports seeks to explore the relation ships between key aspects of the US economy and demonstrate why in recent times ( since 2000 ) the savings rate has become a key  issue in monetary policy.

1. Relationship between Fiscal Deficit and Savings rate ( part I of the series )
2. Relationship between GDP and Savings rate (part II of the series)
3. National Debt and External debt as a % of GDP ( part III of the series)
4. Savings rate Viz External debt (as a % of total debt) ( part IV of the series)
5. Relationship between Fed rate and Savings rate ( part V of the series) 

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Part I of the series

note: Fiscal deficit in image is in millions of US $

Click here for a larger Visual

Between 1981 and 1992 ( Republican years) the deficit was on an increase. At the same time the Republicans went for a strong increase in Debt as a % of GDP and a drop in interest rates. ( i.e Finance the growing deficit with more debt - at a “cheaper cost”) 

Between 1991 and 2001 the 12 month rolling deficit went from a -300 Bn towards a +300 Bn in 2001. The savings rate at the same time dropped from a 8.00% to a 2.00%.

Between 2003 and 2006 Q4 the deficit has been declining ( from a -400 Bn tow a -200 Bn). The savings rate at the same time has dropped from a 2.00 % towards a negative -2.00%.  

There does not seem to be a relationship between the fiscal deficit and the savings rate ( change in one does not seem to result in a change in the other)

Savings by its very nature is supposed to finance the deficit.

Its clear that the contribution of savings towards financing deficit has declined from 2001 (currently at a negative savings rate)

Question 1 - So what is financing the deficit ?

Also see ( will give indications of the fiscal policies of Republicans versus Democrats )

1. USA - USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. USA - Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995)
3. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
4. USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

goto part II of series

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Part II of the series

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Between  1995 and 2000  the GDP grew from 2% p.a towards 4.8% p.a ( 2.8% p.a change) at the same time the savings rate dropped from 4% to 2% ( 2 % change).

Between 2002 and 2006 Q4 the GDP grew from a 0.35% p.a towards 3.00 % p.a growth rate ( 2.65 % p.a change). The savings rate during that period dropped from 2.8% to a negative -1.2% . ( 4.00% change) 

Question 2 - Is the decline in savings rate financing the growth in GDP ?

Also see ( will give  indications of the fiscal policies of Republicans versus Democrats )

1. USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
3. USA - Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995) 
4. USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

goto part I of series

goto part III of series

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Part III of the series

Point I - Historical debt as a % of GDP ( yearly data since 1929 )

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Debt as a % of GDP has been on the increase - especially when the Republicans are ruling

Point II - External Debt as a % of GDP (Quarterly data since 1995)

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• External Debt ( foreign) as a % of GDP has been on a strong increase since 2001.  
• Currently it stands at 17 % of the GDP ( from 10% in Sept 2001 )

Point II - External Debt as a % of  Total debt ( Quarterly data since 1995)

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• External debt as a % of Total debt has been on a strong increase since 2001.
• Currently External Debt forms 25.60% of Total debt ( from a 17.30% in Sept 2001)  

Also see ( will give further indications of the fiscal policies of Republicans versus Democrats )

1. USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
3. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
4. USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

goto part II of series

goto part IV of series

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Part IV of the series

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• Deficit was strongly on the rise from 2001 - and peaked towards 2004.
• Savings rate remained at about the 2.00% area between Q3 2000 and Q2 2002.A small decline in savings rate that started in Q2 2002 went into a sharp decline from Q4 2004.
• From the image it looks like the decline in the savings rate led to the rise in external debt as a % of the GDP ( and as a % of the Total Debt).
• The answer to Question 1 ( in part I of series) - Deficit instead of being financed by savings was being financed by a growth in external debt.
• A corollary to this is that savings instead financed GDP. ( answer to Question 2 )

It is always desirable that the deficit should be financed by internal accruals ( including savings) instead of external debt.

As such increasing the savings rate becomes a key component of Monetary policy. 

Question 3 : What causes increases/declines in savings rate ?

Also see ( will give indications of the fiscal policies of Republicans versus Democrats )

1. USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. Fiscal Deficit and Savings rate ( since 1981 ) 
3. Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995)
4. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )

goto part III of series

goto part V of series

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Part V of the series

Point I - Historical Fed rate versus Savings rate

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Above is the historical  Savings rate viz the Fed rate. Until 1984 the savings rate ranged between 7% and 12%.

The Fed rate peaked at 19 % in 1981 - and has been steadily brought down since. This act corresponded with

• Increase in deficits from 1981 to 1992 and
• Increases in National debt as a % of GDP.

Essentially the idea was finance increase’s in deficit with increases in “cheap debt”.

Point II - Fed rate versus savings rate - trend 

Click here for a larger visual

• Taking the trend in the past 25 years ( when interest rates have been on a decline ) it seems clear that the savings rate follows the Fed rate. 
• Interestingly the drop in Fed rates initially had an almost immediate impact in a drop in savings rate. ( see the first shaded area)
• In the last two drops in Fed rate ( the last two shaded areas) the savings rate initially took 43 months to react in the first instance and 48 months to react in the second instance.

Answer to Question 3 : Increases in the Fed rate normally should result in flattening of the decline in savings rate / possible increases in savings rate.

Point III - Fed rate versus savings rate - reaction

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• It is clear that  a change/decline in the Fed rate has a delayed reaction in change/decline in the savings rate
• In the first instance in the image the drop in Fed rates from May 1989 (9.81%) - resulted in a drop in savings rate from Dec’92 (delay of 43 months)
• A Rise in Fed rates from Jan’94 resulted in a flattening / slowing down in drop of savings rates from Jan’97  (delay of 36 months)
• Finally the drop in Fed rates from Jan’01 resulted in a drop in savings rate from Jan’05 ( delay of 48 months)
• Fed rates have been on the way up from Jul’04   ( from a 1.00% to a 5.25 % currently)

Taking the thumb rule ( 36 months - 48 months ) savings rate should start possibly having small increases from July’07 - July ‘08. 

Also see ( will give indications of the fiscal policies of Republicans versus Democrats )

1. USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. Fiscal Deficit and Savings rate ( since 1981 )
3. Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)
4. Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995)
5. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )

goto part IV of series

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1. The US has not seen Fed interest rates anywhere near double digit since 1985 ( closest it came post 1985 was at 9.80% in 1989 )
2. It is in the US interest that external debt as a % of GDP should be brought back towards the 10% area. ( currently at 17 % ).
3. As can be seen in the series of reports an assumption in the 1980’s of going in for a growth in govt spending ( and thus pushing up GDP growth)  and financing it with “cheaper” debt has now created a society of consumers in the US that do not save. It is not in the interest of the US to allow growth in external debt to finance the deficit.
4. Over the next 30 years - the US will serious structural problems in dealing with Social Security and Medicare.

Social Security and Medicare

Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury. Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in special series, non-marketable U.S. Government bonds, thus the Social Security Trust Fund indirectly finances the federal government’s general purpose deficit spending

In each year since 1982, tax receipts, interest payments and other income have exceeded benefit payments and other expenditures. As the “baby boomers” move out of the work force and into retirement, however, it is anticipated that expenses will come to exceed Social Security tax revenues if there are no changes in current law concerning taxes, benefits, and the retirement age.

According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration) or 2052 (by the Congressional Budget Office), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections.

Solutions

• Reduction in Fiscal deficit ( and going towards a surplus) is an obvious shorter term answer to cap the growth in external debt.
• Savings rate of around 2% + is the longer term solution.

To retain such a savings rate - the Fed rates cannot be below 3% - and will most probably have a lower end floor of 3% going towards 8% over the next decade.   

Note : The Fed rates normally increase during the Democrat President tenures. 

goto beginning of series

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