Can a nation save?


I want to offer here a brief analysis of how I think about saving and investment, and why it is important to be very clear about these concepts in policy discussions.

Usually economists equate saving and investment when they shouldn’t. I find it easier to think of savings as not consuming today in order to consume in the future, whereas investment is the production of some new capital good today, say a building, machine, vehicle, that will facilitate greater production in the future.

Let’s start by looking at saving.

I’ve argued before that you can’t borrow from the future. Debts are merely a trade of goods or services in the present for an obligation of different trades in future periods.

A similar conceptual logic is at play when we think of saving. We don’t produce warehouses full of food, clothes, machines and equipment and store them for the future. My superannuation account[1], for example, doesn’t own a share in such a warehouse in order to provide me with the goods I will need when I retire.

Instead my superannuation account owns monopoly assets. These assets are products of the institutional and legal framework of society. I might own a share of a patent monopoly; a sort of institutional power device that guarantees its owner the ability to capture a share of the income generated by the use tools and techniques covered by the patent.

Individuals save by buying assets that comprise a set of monopoly rights. The catch, however, is that all monopoly assets are owned by someone, so any individual who ‘saves’ by buying monopoly assets is merely distributing future incomes to themselves and away from others.

You may now be questioning my claim that all monopoly assets are already owned by someone. What about if I invent a new technology that I then patent. Didn’t I create new monopoly right that was taken from no one?

Actually no.

When you register a patent you are taking away the right to future incomes arising from that technology that would have been available to everyone else using it, and directing that income to yourself.

Saving at an individual level is merely a transfer, so in aggregate there is no ability to save in the way we think of individual savings.

So why is this relevant to a discussion on how nations can save?

Because a nation is one part of the global aggregate, and can save by accumulating monopoly assets currently owned by entities from other nations.

A country that is saving will run a capital account deficit and a current account surplus. They sell goods to other nations in exchange for monopoly rights to future income streams owned by foreign entities.

Usually this situation is sustained by active management of the domestic currency. To keep the domestic currency value low the central bank prints new money to buy foreign assets. This process decreases the relative value of the domestic currency, increasing demand for exports, and represents automatic saving for the country from buying those assets in the first place.

Modern cases of this mercantilist approach include Japan, South Korea and China.

Now here’s where the link between saving and investment becomes important, but where most economic discussion becomes confusing.

The country doing the saving is technically labelled as having a negative rate of foreign investment, meaning they are buying more foreign assets than foreigners are buying of their assets. Dissaving countries are labelled as having a positive rate of foreign investment.

Such terminology is deceiving; even more so when we think in terms of the investment dynamics at play.

The saving country will be a more attractive place to locate capital investments in tradable sectors because of relatively lower costs.

Countries with net foreign investment will actually become less attractive places to invest in large scale capital inputs to tradable goods production.

The key relationship to remember is this. Countries can save the way individuals can by buying monopoly assets currently owned by foreign entities. But this is merely a transfer between the two parties and cannot happen at a global level.

What national saving does is make the country a more attractive place to invest, at the expense of the non-saving country. Saving increases a countries future domestic productive capacity at the expense of future domestic productive capacity of non-saving countries.

For developing countries, mercantilist policies and national saving are a good thing. But to have a proper debate about economic policy we need to acknowledge the realities of saving and investment relationships between entities and in the aggregate.

fn.[1] The Australian version of a private retirement savings account


  1. Very good clear explanation.

    It is important to note that mercantalist countries can only pursue the strategy, of holding down their currency below what it might otherwise be having regard to their trade performance, if others allow them to.

    Allowing your trade competitors to choose to buy claims on your assets (real or financial) rather than your goods is a policy decision.

    Were mercantalist countries ONLY to be allowed to engage in transactions that actually builds and extends the productive capacity of the country that is the object of their currency manipulations it would be less of an issue but that as we can see that is not what happens.

    Instead what happens is that the currency manipulators buy financial assets such as IOUs secured by mortgages over existing properties, IOUs on future income signed by the Federal Treasurer, title to high yielding rent farming monopolies, title to real assets.

    Why because their goal is simple ‘buy’ stuff that is not goods and keep their currency lower in the process.

    The investment in expanding the real productive capacity of the economy is a much lesser objective because the returns are much harder to find and riskier.

    So why on earth do some countries choose to be party to the strategies of the mercantalists that do not involve investment in expanding their productive capacity?

    Why do they allow it to happen?

    Simple, those in the FIRE sector and their well lobbyied flunkies and tame economists, who run and profit from the mercantalist process transactions are happy to sell out the interests of their country and promote a failed ideology of free markets in international capital to justify the policies they thrust upon us.

      • Thanks Rumples and yes, Pfh. We are patsies. And even though we save 10% of incomes in superannuation – by definition fixed and patient capital – we haven’t increased our charge over global assets in proportion. The failure is a political one.

      • David, JMO, our ‘savings’ end up in consumption e.g. houses and shopping malls rather than production (investment)

  2. One important aspect of ‘saving’ is missed.

    How saving impacts depends somewhat on the state of the particular nation. In Australia’s case our non-saving results in Current Account Deficits and results in our having to sell off natural resource assets like mines and farms. A fact I will return to.
    Let’s assume a different nation that is pretty much balanced in terms of its economy and stimulus or non-saving doesn’t simply resuult in an increased CAD but in fact results in higher levels of both internal consumption and production. So what our descreased saving achieves, if you track the flow of money right down, is a greater use of that country’s natural resources.
    So Rumples while I understand your argument re Super savings, particularly where they are ‘invested’ in some consumption driven investment, in fact saving reduces our demands on the world’s resources.
    Thius is particulalry relevant where we look at negative savings i.e. increased debt. We are simply promoting faster and faster use of the world’s limited resources and, as such, we ARE, as a world, borrowing from the future. Effectively we are using up our children’s future.
    So SAVING, that involves less use of the world’s limited resources, is in fact saving for the future.

    Just to return to Australia’s case where we run a CAD and then sell off natural resource assets to cover for it we are still using up those resource assets by selling them off. So, for Australia, the over-spending and over-consumption effectively uses up natural resource assets.

    Modern economics, on almost all sides, seems to suffer from the idea that an economy somehow operate without any reference to the natural world whatsoever. This is patently wrong and, frankly, bloody stupid. Yet it pervades all modern thought and teaching.

    • migtronixMEMBER

      Ok flawse humour us and just consider the another tale — sure its not today’s tale but what could have been — for an experiment.

      Lets say Australia had leveraged its Ag. and resources positions to build an aircraft manufacturing industry, an shipping industry to rival S. Korea (I mean, we have a lot of ore that be turned into steel and pretty big coastline), a biomed industry that brought in billions per year, a telecoms industry that utilized Australia’s timezone advantage, etc.

      In that case we would have a stonking great big surplus right?


      And if we DO, because, you know, demand is there so why not, how would it change any of what you wrote above…

      This the problem I have, you say WE HAVE to sell more of Australia, but we CAN ONLY do it if there’s demand — and if there’s demand wouldn’t we be selling it anyway?

      It incongruous flawse and I’ve not managed to wrap my head around this here long — I started out seeing things that way then I realised what “money” really is and what demand/supply really mean…

      • My point here was about saving and the effect on resource use gernerally. Low (negative RAT) interest rates and associated credit creation leads to a mis(under)-pricing and over-use of the woirld’s resources.
        Re big surplus I think our society and its consumption should match our production. In the mid to long term you run a balanced economy. This maximises the long term welfare of your citizens without selling off your country to foreigners or having monstrous debt. I wouldn’t proscribe what industries we should or should not have. I’m not that smart! However our interst rates should reflect the true cost of capital being what is required for real savings and our currency value should be such that we don’t live the high life based on a chronic Cad and massive debt and asset sales.

        I’m not sure where you are driving re what “money” really is. My point that the whole model of money and economics that we now use and teach is BS. It is leading to over-use and waste as we undervalue the world’s resources. Somehow or other NOBODY that I read considers this at all. The incongruity of being ‘GREEN’ and wanting even lower interst rates so we can waste more is mind-boggling for a SOB like me.

        As far as Aus itself goes pfh’s post is eminently sensible and we ought think about fixing up our own country before we start telling the rest of the world how damned smart we are! This bloody baloney of saying We’re so clever! Llook at us for a model of economic success that you should all adopt” is baloney. Our ‘success’ has been pretty much solely due tpo teh fact that we have had such vast natural resources to flog off..and I don’t mean save, invest, buy the machinery with the savings and then mine and sell teh product. …I mean do nothing. Just sell the in-situ resource to a foreigner and consume the money we get from that. Then the foreigner buys all the imported machinery and builds the minre with our labour. The long term profits then revert overseas…as they should.

      • migtronixMEMBER

        I have no problem with any of that flawse as I’ve mentioned several times myself, YES we SHOULD be at least modding our own combines and harvesters and diggers and whatever else we need to efficiently extract value from the massive natural resources and thereby providing an industry outside the immediate extraction processes. I wasn’t trying to pick winner or claim “smarty pants” or anything it was just a thought experiment based on what I see out there — heck look at Peter’s Icreams, how that gets sold to the French with a record high AUD is precisely what you’re talking about – short sighted!

      • Mig….I presumed it was a thought experiment. The picking winners was aimed at myself and just trying to head off the idea that I was trying to determine anything.

        The ONLY point I’ve really want to make in this discussion is that our current monetary policies and economic beliefs are destructive and the profession is totally unwilling to face the facts of the result of negative RAT rates and insane credit creation.

        My mention of the CAD in this was just to try to show the flow of money – where it goes to and keeps on going to unless you take it out of circulation through savings (interest rates) or tax.

    • We are not borrowing from the future, we are eating it or stealing from it.

      If we were borrowing from it we would be paying it back at some point in time.

      We won’t be paying back the resources that are degraded or become grossly cost negative to recover.

      The iron ore and coal that has been turned into steel but rusts out over 100 years and is then discarded to land fill will not be mined again and turned back into steel.

      It is ultimately a finite world and infinite population growth and resource usage won’t work.

      War, famine and disease will eventually fix the population problem. We won’t because there are too many vested interests and no-one wants the pain now when they can defer it or push it onto someone else.

      • Explorer
        May 29, 2014 at 11:56 am

        “We are not borrowing from the future, we are eating it or stealing from it.”

        Give that man a ceegar!

      • It all ebbs and flows, you just need to take the long view. No one really laments the extinction of the dinosaur, and we can’t seriously suggest that anyone will one day lament the depletion of iron ore or lakes or forests when there is no possible way of understanding the longer-term evolutionary ecological response to such eventualities. We must as always focus on what we can control, that is to say – paying back the future via our current innovation and development of new, as yet unknown resources and technology which will benefit future generations in a way that we can’t yet fully understand, but which will most certainly compensate for any loss of existing non-renewable resources expended in the course of that innovation.

        We owe it to that future to ensure that innovation in our present time can thrive, and to do that we need to ensure that both our financial and human capital has the proper incentives. For this reason, I have come to the conclusion – albeit grudgingly – that it is paramount that we have policy which does make life just that little bit harder for the non-productive (regrettable as their circumstances may be), to make the pathologically unwell think twice about wasting valuable intellectual capital, to ensure our resource sector enjoys the levels of flexibility and return acceptable to foreign capital, to increase the cost of university education to ensure that resources are funnelled towards the best and brightest and most likely to innovate

        To ensure that the collective wisdom of profit maximising individuals alone determines the allocation of capital, to maintain returns to vested interests, and maintain the incentives promoting capital speculation which while ostensibly currently non-productive may nonetheless generate a financial return which ultimately flows at an aggregate global level into the kind of productive investment that will reap an ultimate dividend of increased innovation for the benefit future generations.

        In a globalised, harmonised, consolidated economy, an arcane concept such as the CAD won’t even exist. What matters is that future generations of humans, of humans I must emphasise, benefit from the aggregate allocative efficiency of our global economic system. At heart, the current whining about winners and losers and CADs and savers and debt slaves is just old fashioned racism dressed up as nationalism. That’s right, racism. You’re either with us – the human race – or you’re against us, and a filthy racist to boot.

  3. Interesting read, I agree with most of what your saying but I’d really prefer it if the patent treatment matched the reality of patents. Seems to me your model is also missing the new company formation model of savings. This is important because the NPV of high growth companies is reflected in their Market Cap and this “equity currency” enables them to acquire existing assets. When you include successful start-ups in a savings model it’s obvious why improved human capital (applied education) is the true source of all savings.

    • Nope! We do not. We might save the equivalent of our borrowings in A$ however we end each year with increased debt in the foreign account. Of course under a popular current model, as recently outlined in these pages, this is regarded as free money and has no consequences at all for us. So if you want to classify foreign debt and asset sales in that light then you are correct. It’s all good! We can do this forever and ever and it is limitless. Herb Stein must have been WRONG!

      • Well we can only save in our own currency what we have in our own currency. If we want savings in foreign currency we have to produce more than we consume, which I think is what you are referring to.

      • Well we have to prioduce as much as we consume. We don’t and have not done so for a long time.

      • Yes but that is a separate issue to savings held by the community which is what I thought rumples was discussing. He has since given more weight to his definition of savings, so it looks as though I had the wrong definition.

        I agree that the “value” of our savings or “investments” will be determined by how efficient the end use is.

        I don’t think that anyone has suggested that a determination to maintain production and export levels was not a priority, but we shouldn’t confuse the accumulation of $AUD with the accumulation (or otherwise) of foreign currency. They are two separate issues. A high income in foreign currency does not lead to more $AUD it leads to a greater buying power of existing $AUD.

      • “A high income in foreign currency does not lead to more $AUD it leads to a greater buying power of existing $AUD.”

        True! ( I presume we are talking NET income).
        ( Thinking out loud…If I export the bank gets the USD and issues me with A$. So you’d get an increase in A$. I save them or spend them. If I spend them you’d have more A$ of one form or another) in circulation. Similarly imports SHOULD result in a lower amount of A$ in circulation but between teh banks and the RBA they make sure that doesn’t happen by ‘printing’ and ensuring continued negative RAT rates. All teh self-adjusting mechanisms in economies have been over-ridden!)

        Now remember the corollary is also true. You print the damned things they are going to be worth less…which has been something of a bugbear point around here.

      • @ flawse said If I export the bank gets the USD and issues me with A$. So you’d get an increase in A$.

        I don’t believe so, the bank or whoever was handling the transaction would swap the USD that belonged to you for AUD with someone who had AUD but wanted USD to import goods.

        So you would end up with someone elses AUD and they would have your USD.

        The net AUD hasn’t changed at all, so no change to the value of the AUD on forex markets.

  4. Rumples,

    Are you suggesting that a country which runs a CAD can not net save? If so, then I fundamentally disagree.

    • Rumplestatskin

      “Are you suggesting that a country which runs a CAD can not net save?”

      Yes, as per my definition of accumulating monopoly assets currently owned by foreign entities.

      But that doesn’t mean that such a country won’t invest in capital and increase future productive capacity, Quite obviously the imported goods Australia gets in exchange for our assets include much of the capital stock – vehicles, building materials, tools equipment etc.

      In my conclusion I explain that countries that save become more attractive places to locate new capital to produce traded goods. In general this accelerates capital investment in those countries by comparison.

      • Perhaps I still do not quite get your point, but I think I still disagree. Here is something to think about.

        Investment = Savings. More to the point. Investment CREATES Savings at an international and national level.

        One persons income is another’s expenditure. When person A buys a product (say labour) from person B, A dis-saves and B saves. In aggregate national savings does not change.

        Now suppose a Company want to build a new Bridge (monopoly asset). It will be the only bridge in town but it is considered a good investment because transporting goods across a river is time consuming and requires a lot of labour (real resources).

        The company pays workers $100m to build the Bridge. The workers end up with $100m in wages (savings), the company loses $100m in cash (asset) but gains $100m in a bridge (monopoly asset).

        Net, net, the Country has generated $100m in savings. Exactly equal to investment.

        The owner of the monopoly asset (Bridge) does not take away the future income from consumers (toll) as you seem to suggest. The over all productive capacity of the Country has improved as we can now transport goods more efficiently from one side of a river to the other. Irrespective of the toll, the fact is the country now uses less resources to move goods from one side of the river to the other. That reflects are a real standard of living improvement. The extent this improvement is shared between workers (toll paid) and shareholders (dividends received is another matter.

        Net Net, the country has net savings, and is better off – even with a “monopoly asset”.

        The MR people call this S = I + (S – I). I think there is a lot of value in this thought process.

        What about the CAD?
        Yes – the CAD results in foreigners accumulating $A savings. However, to the extent the CAD is less than investment (as % of GDP) the country is still net saving.

        So in my earlier example if the CAD was -$50m, the net result would be;
        Factory = $100m
        Loan / cash paid = -$100M
        (business has zero net savings)
        Domestic savings = $50M ($100m from wages less $50m buying imports etc)
        Foreign savings = $50M

        For more on INVESTMENT + SAVINGS, the following link offer some good references.

      • Rumplestatskin

        I get your point b_b. You are labelling investment as savings. Why don’t we just drop the term savings, which I’ve described as a transfer of assets between entities, and stick with investment.

        Sure, when you build a bridge you get one bridge’s worth of investment. It’s value does not have to be related directly to its costs. You can build a bridge no one want to use.

        The owner of the bridge certainly does take away from the future income of others by being granted a monopoly right to charge for its use. Whether this right is justifiable because the bridge improves the productive capacity of the city is a moral question. But certainly a government could confiscate that right at any time and redistribute income back to the rest of society.

        The point here being that it is the choice of physical investments that makes a country wealthier over time. It is not this thing called ‘savings’ which is merely a transfer of existing assets between entities. Investment doesn’t require ‘savings’, although when we balance the accounts we call what we spent on investment instead of consumption goods both savings and investment.

      • “However, to the extent the CAD is less than investment (as % of GDP) the country is still net saving.”
        Yes theoretically but…..

        So if we have built all these efficient ‘bridges’ how come we are stilll running up more and more foreign debt and, daily, sell off more and more of our mines farms and food chain to foreign intersts?

        The fact that we find ourselves, as such a resource rich population, would tell any reasonably questioning mind that something has gone badly and fundamentally wrong..

      • “Sure, when you build a bridge you get one bridge’s worth of investment. It’s value does not have to be related directly to its costs. You can build a bridge no one want to use.”

        I agree. The term “I” refers to net investment (net of depreciation / obsolescence). I was going to include this in my analysis but it was already getting too long. I think most economists refer to I as “net”. I assume you would have too.

        “The owner of the bridge certainly does take away from the future income of others by being granted a monopoly right to charge for its use. Whether this right is justifiable because the bridge improves the productive capacity of the city is a moral question. But certainly a government could confiscate that right at any time and redistribute income back to the rest of society.”

        From macro perspective, the bridge takes nothing away. the Toll from consumers = dividends and costs to company. Net zero. It was the Building of the Bridge that creates the savings. Your statement above only thinks of the consumer. But at a macro level, there is a Bridge, and it has freed up real resources in the economy. It reflects national Investment. And I (net) = S.

        “The point here being that it is the choice of physical investments that makes a country wealthier over time. It is not this thing called ‘savings’ which is merely a transfer of existing assets between entities. Investment doesn’t require ‘savings’, although when we balance the accounts we call what we spent on investment instead of consumption goods both savings and investment.”

        I agree Investment does not require savings. As I showed, Investment creates savings.

      • Rumplestatskin

        B-B, yeah, I thought we were on the same page. Investment generates savings. Though I hate the use of the term. It should really be that investment doesn’t require savings but does increase future productive capacity.

        The bridge does not take anything away from the macro perspective. Again we agree. But the right to build the bridge going to one entity instead of another (say a government that pools resources from everyone), does affect the distribution (of a larger pie) in future periods.

      • @ flawse.

        “So if we have built all these efficient ‘bridges’ how come we are stilll running up more and more foreign debt and, daily, sell off more and more of our mines farms and food chain to foreign interests?”

        It is because we have a floating exchange rate.

        As I mentioned to you last week. If Australia invented a highly desirable product, that only Australia could produce (say an elixir for ever lasting life), what do you think the outcome would be?

        A. Rising exports and current account surplus or
        B Rising exports for the elixir, a rising $A causing falling exports in other industries (like tourism), and a continuing current account deficit?

        Hint: Think mining boom.

      • SweeperMEMBER

        I sort of agree with b_b on this.

        It’s more correct to think of a country’s saving as it’s investment. If saving is a way of trading consumption today for additional consumption in the future, the only way to get the additional consumption in the future is to invest in capital goods today.

      • “I agree Investment does not require savings. As I showed, Investment creates savings.”

        This LINE of thinking fundamentally causes a misunderstanding of what is going on. There is no straigh line from A to B. What we have is a loop! Investment creates savings! Investment requires savings. If there is no saving for the investmenbt you are either
        1. Simply creating more debt because you are just adding to overall expenditure
        And/or 2. Using up the world’s resources at a faster rate.

        In Australia’s case most of any increased investment, no matter how or where it is spent, ends up in the Current Account. This is a result of running Govt deficits and a negative RAT interst rate resulting in nil domstic savings. We do have some forced ‘savings’ but few of these are ending up in ‘investment’ Most are in Banks which are NOT a productive activity but a COST to productive activity, Shopping Centres that produce absolutely nothing but promote more imports and therefore more foreign debt and houses (overlarge?) which themselves also mostly require imports to fill hem with ‘stuff’, etc etc
        Our problem is that after 50 years of this tripe we nowq have a fundamentally unbalanced economy, geographic and social structure, and financial system.

      • Sweepr

        My position is that there is no absolute position! It depends on where you are in the loop. In a balanced economy you can build things and most of the money will end up either in circulation in an expanded economy and/or back in teh Govt cofdfers in increased tax receipts etc.
        Our problem now is that we are so far gone, in the face of Govt deficits and negative RAT rates, the awful structure of our economy means that most of any ‘stimulus’, be that private or Govt, ends up in teh CAD and requires more sales of our resources, farms, food companies and houses to foreign intersts. The more this happens the less these fundamental things are affordable to our own people.

        The problem with teh way all sides of economics thinks about money now is that they don’t follow the flows through to watch where it all ends up and what happens along the way as each spin-off occurs and that flow then follows it’s own path down. That path down ends at consumption of resources.

        Note I do recognise investment for efficiency. I’m just trying to limit the verbage!…. But. Frankly, in Australia there is little of that. Pretty much all we have is investment for more consumption (GDP) that all sides of the economic argument regard as growth and success.

      • If our currency value was being determined by the status of the Current Account…great! Have a flexible exchange rate. In fact, as I recall you yourself have theorised, the value of the exchange rate, in current practicve, has almost nothing to do with the status of the Current Account then we have a problem.

        Now again there are loops to all these arguments however….It looks top me right now that we are demanding our entitled living standard (N.B. be that by boomers, young, old, workers, CEO’s… anybody I don’t care…that’s a separate argument) We will not tolerate any cut in that living standard. If this currency drops we are going to get a drop in living standards…that’s just the state we are in. So we have a level of consumption we are demanding most of which is imported. So we sell off our country to pay for it.
        The value of the exchange rate is mostly being determined by Yellen (Bernanke) Draghi et al in their reckless ‘printing’ (used in its broadest sense and by our own willingness to sell off our nation at the fastes rate we can to have a high exchange rate and let us consume more.

      • @Flawse

        “This LINE of thinking fundamentally causes a misunderstanding of what is going on. There is no straigh line from A to B. What we have is a loop! Investment creates savings! Investment requires savings. If there is no saving for the investmenbt you are either
        1. Simply creating more debt because you are just adding to overall expenditure
        And/or 2. Using up the world’s resources at a faster rate.”

        This is fundamentally incorrect. My example is pretty clear. The Investment creates the savings. I think Rumples agrees. I has zero to do with the CAD. Again, as I explained.

      • SweeperMEMBER

        In the GT, Keynes argued that saving was a function of investment when an economy was below full employment (similar I think to what b_b is arguing).

        “Aggregate saving” is a really confusing and not very helpful concept I think.

    • A country that runs a chronic CAD over 55 years DOES not save! There is no argument about it. It’s just a fact

      • The whole Investment = Savings equation is ridiculous when seen in practice. And a perfect example is Japan Highway Public Corporation (JH), which has built superior roads and engineering structures that are world-beating… nowhere. Even the tolls do not cover costs and ultimately someone carries the can, whether it’s through loss of face, increased taxation, or dreams carved from delusion.

      • Rumplestatskin

        flawse, I know this is your bugbear. But as I said in the conclusion, the morally acceptable position is that developing countries should control their currency, promote national investment schemes, and run a CAS in order to facilitate domestic capital investment and growth.

        But for that to happen the wealthy countries will need to run CADs. After all, globally all the accounts must balance.

        I don’t think it is a major problem economically, though it probably is geo-politically. After all, if the world were one country we wouldn’t even bother discussing CADs, just like we don’t really care about them between Australian States.

      • Rumple – I have to disagree.

        A developing country does not need CAS to fund investment. And they certainly should not have a fixed exchange rate and lose autonomy over money supply (thats how south american got into trouble).

        The loan creates the deposit. I think you agree on this point. Therefore the funding is ALWAYS available for worthwhile projects. No need for “foreign funding”. Therefore no need for CAS.

        Fixed currencies usually end in disaster.

      • If you just have loans creating deposits…i.e. no savings you not only don’t need a CAS…You’ll NOT have one. You’ll have a CAD.

      • Rumplestatskin


        You’re right, a country does not need a CAS to fund investment. In fact it is just a by-product of the process of managing the currency to capture export demand.

        They need the low exchange rate to make investing attractive for some export industry.

        Usually developing countries have no particular advantage in producing anything, since they lack capital and expertise. So by keeping their exchange rate relatively low they can generate export demand for initially low-tech production of tradable goods, and invest in those sectors knowing that the export demand for greater output will be there.

      • Rumples again I think the financing of the development and growth over the medium term is best done with a balanced economy. Yes you will have high savings, tending to a CAS, and investment. However as long as you have high investment this will chew into the Current Account…theoretically.
        China is a bit of an anomaly here for me but that game is not yet over. Such things are also influenced by nationalism etc that IS very strong in China (well a desire to buy Chinese made stuff) Also China itself has massive resources over a very large land mass and it sure as hell has stuffed up a fair part of its environment (used resources) in all this.

      • “…Therefore the funding is ALWAYS available for worthwhile projects. No need for “foreign funding”. Therefore no need for CAS…”


        Developing countries do not need to run a CAS to develop – sweepers point on mercantilism is relevant here.

        They certainly need to trade in order to acquire some of the capital and other goods that they cannot produce and a floating exchange rate is also appropriate.

        But they don’t need foreign funding to undertake investment and by that i mean the efficient and effective allocation of the nations resources – natural and human – to improving the nations wealth, by individuals and collections of individuals in the form of private and public organisations.

        The majority of what is required lies between our ears and involves a bit of effort.

      • Rumple,

        You are going to start thinking I am picking on you, but I’m not. In fact I think you are the best blogger here.

        But a lower (peg) currency does not help developing countries. I makes it worse. As Pfh correctly identified, developing countries need technology to lift their standard of living (tractor for ploughing fields rather than the Ox). They need net imports. A low currency makes this process expensive, and painfully slow.

        A low currency (and low wages) may keep the masses employed, but in effect they simply become slave labour to other Country’s consumption. Which is what a trade surplus really is – domestic slave labour for foreign consumption.

        The masses can be employed by their own economy. There is plenty of availble work in developing countries. Education, sanitation, heath, and very basic infrastructure are just a few examples.

        Removing them from this essential work, and forcing them to make cheap I-Pads does not help their standard of living.

      • Rumplestatskin


        This is the ‘normal’ economic view of development. However, I suggest you read some of Ha Joon Chang’s work on managed development by the asian tigers.

        Certainly your point about needing to import specialist machinery is true. China, Japan, South Korea, UK before them, all had trade barriers in place to ensure that they only imported equipment necessary to increase domestic production (things that could not be produced domestically).

        Chang tells the story of Korean government management of the types of tractors, machines and so forth allowed to be imported. They had a list of goods that were allowed, so to borrow designs and aid local manufacturing, and goods that were not, like cigarettes and other consumption items.

        There are almost no examples (none I can think of right now) of countries developing rapidly without the process being ‘export led’.

        Yes, it is a long hard slog. Yes, it does mean that people work as ‘slaves’ to produce goods for consumption abroad. But that is the inherent trade-off; less now, more later.

        A developing country can of course do as you say, and import machines to improve production of domestic goods and services, but it traps them into producing the same low value outputs. They can never catch up in this way.

        Also remember that if the developing country is a net importer, they are selling off domestic assets in order to buy these imports. They are giving up the future income stream from these assets.

        Development is a complicated story for sure. But my view is that the mainstream economic approach is rather disconnected with reality, and that experience suggests that my views on currency management, investing in production of export goods, etc, is the normal recipe for development.

      • Rumples,

        With all due respect, your views are mainstream. That is why

        “There are almost no examples (none I can think of right now) of countries developing rapidly without the process being ‘export led’.”

        It is time for a different approach. But the western ideology taught to developing countries is to “keep wages low, keep currency low”, so we can have our cheap imports!

        Importantly, this takes away real resources (labour and materials) from what a developing country real needs. Decent infrastructure, heath, sanitation, and a legitimate legal system. You will find once these thing are put in place, imports (foreigners saving in the local currency) in would be a much easier thing to do.

        It’s a bit of a con. Sadly I do not expect the world to change.

      • migtronixMEMBER

        @b_b so you’re saying China is under developed because of low currency exchange rate but not Venezuela before they fried theirs? Highly unlikely, there are political factors that over ride FX liberalisation

  5. Ronin8317MEMBER

    While the emphasis on good and services may once be true, modern finance have created so many ‘debt obligations’ that it is impossible to realize everything as consumption. So monopolization of assets is now merely a sideshow, ‘money’ has become its own reward.

    Money is not everything though, national interest exists independently of the economic system. However, during times of war, your foreign assets may be confiscated, and domestic manufacturing capability will get destroyed. Economy during war runs on completely different principle.

  6. SweeperMEMBER

    A mercantilist policy is a lot more than fx intervention. Buying foreign assets in order to suppress the nominal exchange rate, by itself, wouldn’t be a mercantalist policy (over the long run it would stimulate exports and imports equally).

    To follow a mercantilist policy, a country has to hold disposable income growth below productivity growth. This can be done by combining a tight money policy with nominal exchange rate intervention (China), or it can be achieved through a policy of forced saving (Singapore).

  7. Cameron, can you explain this: “Instead my superannuation account owns monopoly assets.”

    The post hinges on this point and I think you need to explain it.

    • Rumplestatskin

      Sure. It means that you own some legal right to a future income stream. When I own shares, I own a right to get some of the income generated from the monopoly assets of the company.

      I use the term monopoly quite generally. A company’s monopoly includes its trademarks, tangible assets (land, building, equipment), contracted staff etc. There are all little monopolies that come together in the corporate structure, and I buy a right to part of it.

      If you think about debt instruments, they are a right to some future income stream.

      • migtronixMEMBER

        Really? Isn’t it purely a claim on a potential liquidation, with the real reason you buy shares being a claim on its future desire to others increasing (i.e. cap gains)? If it was purely a right on income generated who the f#ck invested in TWTR/FB!?!?!

      • I dunno…SOME of us invest in possible income streams and they may be 15 years away.
        However probably you are right and most ‘investment’ is just a spin of the wheel at the great casino.
        Does a BIG super fund invest looking to liquidate? I doubt it but I’m open to persuasion. Once you have big positions they are damned hard to liquidate.

      • FWIW, a few thoughts from me.

        Reading this post, I couldn’t help but think of Israel Kirzner. You’ve written that savings are a claim on a firm’s monopoly assets. I’ve only just starting reading Kirzner, but he notes that monopoly can be brought about by an entrepreneur seeing an opportunity and acting upon it. Where the area in which the entrepreneur acted is subject to competitive forces, the monopolist may only be a monopolist for a certain period of time. Market processes will respond, and it is here that Schumpeter could be invoked to show us that the monopolist may well be destroyed. It strikes me that the monopoly assets you talk of, which are transferring income to the owner from others, are subject to competitive forces that may erode the monopolistic nature of the resource owned. Why is this important? You write of monopoly assets brought about by savings as always being monopolistic, as if this is a guaranteed claim on future incomes. Yet as Kirzner notes, true monopoly can only be brought about by having complete control of a resource (as opposed to a production method, type of good, etc that are protected under patent and constitute ‘monopoly rights’). I don’t think that that distinction has been made. Kirzner notes that those with no initial assets can buy all of a resource and turn themselves into a proper monopolist. Kirzner doesn’t say how you would buy this monopoly control of an asset without having assets, but I’m assuming debt could be very useful here, allowing an entrepreneur who sees an opportunity to become a pure monopolist by buying complete control of a resource.

        I see what you’re saying about having a surplus of savings may make you more attractive for investment and thereby increasing our productive capacity, but I don’t think that savings are a guaranteed future income stream, and that borrowing, if productive, can disrupt the saver’s income stream.

        Perhaps I’ve misread your piece, but anyway it is something to think about.