The current state of the global economy is often referred to as a debt crisis, but in economics, there are two sides to every market. You can’t have chefs without farmers, or factories without workers, or trucks without roads. The other side of borrowing is lending, and the ultimate basis of lending is saving. The debt crisis, then, can also be seen as a crisis of saving.
This is the opposite of what common sense tells you. We always hear that people are not saving enough, and in a very real sense, on an individual level, that is true. But the larger problem is the amount of money people are trying to save. If everyone were to save as much as they wish they could, the global financial system would fail. Indeed, the point of failure is already uncomfortably close.
It is important to understand the proportions involved. In the United States, financial planners recommend, for those who have the financial means, a retirement fund of $3 million. That’s what it takes to maintain a prosperous, upper-middle-class, not-quite-wealthy lifestyle through retirement, allowing for the possibility that you may live as long as you can statistically expect to. The average American hopes, through some miracle, to be able to retire in this fashion. The average American would certainly save this kind of money if this could easily be done.
But it is economically impossible for everyone to save this much money. Soon there will be one third of a billion Americans. If everyone had a full retirement fund saved, the total savings would be one quadrillion dollars.
It is hard to explain the scale of $1 quadrillion. It is hard, first, because of the magnitude itself. In the United States, we have only recently learned to consider issues of $1 trillion without trembling. One quadrillion dollars is one thousand times that. But even when you understand the magnitude, one quadrillion dollars is hard to understand for a different and more fundamental reason.
To put the problem very plainly, there isn’t that much money. Not really, not in the sense of money that you can spend right now. The world is prepared to deliver not much more than $2 trillion in goods and services at any one time. That capacity sets the limits on the amount of real, active money there can be. There is possibly $2 trillion in real, spendable money worldwide. Any money in excess of this exists only because we aren’t all trying to spend it at once. The actual amount of money is considerably larger than this, an order of magnitude larger, but it is possible for that money to exist only because we are systematic, orderly, and predictable in the way we hold money before we spend it. Anything that interrupts that flow, then, can become a crisis of money. The more money that is saved, in proportion to the world’s productive capacity, the more easily such a crisis can occur.
So if there is only something like $2 trillion in real, spendable money, how can we ever save $1 quadrillion for our retirement? Well, we can’t. It is as simple and as stark as that. Worse, the more we save, the more top-heavy and fragile the financial system becomes. And then, anything that abruptly changes people’s view of money or otherwise shakes up the way people handle their money can create a crisis.
And the situation is worse than what I have laid out so far. It would take $1 quadrillion to fully finance the retirements of people in the United States. What about the rest of the world? For that matter, what about the sovereign wealth funds, billionaire-investors, and criminal enterprises? They all want to save money too. One way or another, the world is well on its way toward $1 quadrillion in savings, and there is no easy way around it. We can’t sort it out by making minor adjustments here and there. Suppose Americans voluntarily decided to live on the edge of poverty in our retirement years. That would reduce the U.S. retirement savings load only by a factor of about 8 from the imagined ideal. That adjustment is not nearly enough to bring retirement savings within the realm of real money.
So what are the consequences of the quadrillion-dollar retirement savings load? These are some of the more immediate, obvious, and colorful ones:
- Low interest rates. Currently, interest rates are near zero. You should not plan on them going up before you retire.
- A perpetual state of financial crisis. The savings load isn’t going away, so the financial crisis will not go away either.
- Savings wiped out. In theory, much of our $1 quadrillion in savings is insured or hedged in some fashion. But if the amount of real money in the world is only on the order of $2 trillion, how real can the insurance be? Given the leverage involved in the financial system, it is not hard to imagine an institutional crisis of a scale large enough to wipe away not just one retirement fund, but an entire country’s retirement savings.
- Price spikes and bouts of hyperinflation. A world that has $2 trillion in real money and close to $1 quadrillion in phantom money faces the risk of unpredictable shortages and price increases whenever people in large numbers try to convert their phantom money into real money. This can happen just because masses of people lose confidence in an institution or otherwise change their opinions of money in some way. Yet price spikes could reverse just as abruptly if opinions change again.
- New currency. A financial crisis on a large enough scale could wipe out a national government or render its money worthless. Yes, this could happen in your country too. There is a very real chance that the currency you use now will be abandoned in your lifetime.
- High prices for real estate and gold. People who cannot spend their “phantom” money in any useful way on goods and services will elect to spend some of it on unproductive but scarce resources that they hope will convey some privilege in the future. This kind of spending will drive up the prices of various assets, including real estate and precious metals, especially gold.
As far as I can tell, the quadrillion-dollar savings crisis is completely unavoidable. For two centuries, since the dawn of the industrial era, we have managed economic matters with the understanding that any problem in economics or finance could be overwhelmed by economic growth. This is the approach that has rescued the government-sponsored retirement systems up until the present, but no one really believes it can be pushed much farther. The savings crisis does not lend itself to this kind of thinking at all. Indeed, as individuals become more prosperous and shift their financial focus farther along the continuum from labor to savings, the savings crisis gets worse. But this is so counterintuitive that it may take a generation of ongoing financial turmoil, or an actual worldwide financial collapse, before leaders consider that a different solution is called for.
That solution, when it comes, will restructure things to put less pressure on the financial system. Our current consensus idea of retirement will have to give way, which also means our idea of work will have to change in a fundamental way.
On an individual level, what can we do? I wish I had more answers than I have. I can do little more than repeat the same advice I have offered for years. The ability to work, which essentially means staying in good health, is the most valuable thing you can have. Education is important. It is important to have friends.
There will be financial answers too, and I have some thoughts about what those might be, but it is perhaps a bit beyond me to try to spell them out here today. I must add, though, that no one should imagine that a financial collapse, if one should occur, would lead directly to an economic collapse. As long as most of us are able to work and we do not lose sight of what is needed to take care of each other, the economy will carry on.