hello
i joined the forum today itself and this is my first post.
i have come across 3-4 articles which read that a low savings rate in the US economy is one of the causes for the dollar being weak. I didn't understand this correlation. it'll be great if sumone can explain it.
and supposing in india, every individual stopped saving a proportion of their income, spent it all, what effect would it have on the currency?
udit

hi udit,

welcome to informedtrades!

my understanding as to why the dollar is getting weaker is that there are two factors at play:

1. excessive expansion of the money supply (i.e. creating too many US dollars)
2. foreign countries selling their reserves of US dollars

i'm not sure if personal savings rate affects the value of the currency; i've never heard that before, although maybe someone else has that can share their thoughts.

Hi Udit,

Glad to hear from you and good question.

Both of the things that Simon has mentioned below are reasons that are pointed to for weakness in the US Dollar. One more thing that I would like to add to his list in order to answer your question is:

3. the fact that the US has a large trade deficit with the rest of the world meaning that we import more than we export.

There are direct and indirect relationships between the value of the US Dollar and the nations savings rate which relate back to the current account, the capital account, and how the different components of each line up to form the balance of payments.

Trying to wrap one's head around all the math is pretty difficult but it basically comes down to how a country's savings rate and therefore spending affects its trade balance with the rest of the world and how this in turn affects the value of the currency.

There is an article here that goes into more detail about this and explains this relationship with the following paragraph:

"A nation’s aggregate purchase of goods is the sum of what its public and private sectors spend on consumption and investment. Its aggregate sales of goods equal the value of what its public and private sectors produce and this, in turn, is its aggregate income. Plainly, the difference between a nation’s spending and earning must be its trade balance with the rest of the world; if its aggregate purchases exceed its production/income, then some foreign goods must, on net, be coming in to satisfy the excess demand. Finally, since income must be either consumed or saved, the spending-earning gap is also the investment-saving gap; consumption cancels from both sides of the equation."

So in short the direct relationship is between the savings rate and the affect that this has on the negative trade balance that the US has with the rest of the world.

For more on how a country's trade balance affects the value of its currency see my lesson on trade flows here.

Hope that helps. If there are any other questions or comments or if anyone else has any thoughts on this one please feel free to post them here.

Best Regards,
Dave

hi folks,

the difference between personal savings and (bernanke's) printing press?


here is my opinion (not tooooo academic :-):


if the money one country spends comes from work of its people, their savings and productivity, we speak about honest money, healthy economy + real wealth.

on the other hand, if the money one country spends comes just out of thin air (bernanke's printing press + helicopter), it's just an ugly fraud!

in the long term it is not possible to produce wealth by printing (paper) money. the only things what happen are INFLATION, asset price bubbles (stocks, housing, van goghs + picassos + warhols, ...), INFLATION in every-day-products (like now!), CRASH of the currency, RECESSION, ... and after a while there is again a new chance for a solid financial policy + solid economy + ...

there is a lot of information about Austrian_Business_Cycle_Theory in the web, for a fast overview try e.g. Austrian Business Cycle Theory - Wikipedia, the free encyclopedia

regards ,
j.