The Global Economy in Turbulent Times

CHAPTER 22 The Paradox of Thrift¹

The year 2008 was a disaster for savers. We are taught from a young age that we should always save; that saving is a discipline in prudence. Indeed, it’s a virtue. Stock markets the world over have since plummeted, with the value of investments having fallen by about 50 percent, estimated to be now US$30 trillion below its peak. The prices of bonds and commercial property have also plunged. Those who diversified to commodities, hedge funds, and private equity fared no better. Even those who only saved with banks had to worry about the safety of these institutions, including the “branded” banks (so much so that governments in many countries have had to step in to guarantee bank deposits). Worse, the value of most people’s main item of wealth—their home—has fallen sharply. This is my eighth recession—I have not seen anything quite like this.

Savings

The savers’ pain can be ascertained from pooled portfolio investments: American mutual funds were reported to have lost US$2.4 trillion in the first 10 months of 2008. The value of US pension funds dropped by US$2 trillion during the 18 months prior to October 2008. This was before Black October 2008, when the New York Dow Jones Industrial Index virtually collapsed. From its high in October 2007, the Dow took only 503 days to fall 50 percent, a full 320 days faster than the Nikkei took to fall 50 percent after the Japanese bubble burst. The Bank of England estimated that close to US$3 trillion was ...