Posted by Joseph Y. Calhoun, III

Bob McTeer, former Dallas Fed President, has this to say about the increase in savings reported in the last income and spending reports:

What happened in May was that the government increased its budget deficit (increased negative saving), borrowed the money, and paid it to individuals as part of the stimulus package. Since individuals saved less than 100 percent of their higher income, they added less to saving than the government subtracted from it.

Assuming no offsetting increase in business saving, the national saving rate declined in May. Chances are, however, that business saving declined as well. If so, the decline in national saving was even greater.

A decline in national saving will necessarily be matched by a decline in national investment if it isn’t made up by more saving imported from abroad. We import foreign saving by running a larger current account deficit, which requires an equally larger capital inflow to finance it. For many years now, we’ve had to supplement domestic saving with foreign saving to finance domestic investment. This runs up our total debt owned by foreigners and increases the burden of servicing that debt in the future.

I’m sorry, but borrowing the money to save doesn’t work.

I made a similar observation in my last economic outlook (available to subscribers):

While savings at the individual level is rising out of necessity, the increase in the government deficit is offsetting the savings of the private sector. It is national savings, including the government, that needs to rise so we can build up the capital needed for the next expansion. While Fed policy is probably appropriate at this time to prevent a destructive deflation, fiscal policy is shaping a recovery that once again will not be sustainable.

We cannot borrow our way out of a mess caused by too much debt. While the Fed seems to be engineering a short term recovery, savings and investment are the fuel for future, non inflationary growth. Unless the government stops offsetting the positive effects of private saving, any recovery will be unsustainable.