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Understanding the graph

The graph is generated from the Federal Reserve Economic Database (FRED), with the labels attached by the wikipedia editor. The FRED data series are specified below.

The graph represents the U.S. private sector financial surplus (savings minus investment). In a healthy economy, private sector savings placed into the banking system is borrowed and invested by companies. This investment is one of the major components of GDP. During the subprime mortgage crisis and ensuing recession, consumers increased their savings as they paid down debt ("deleveraged") but corporations simultaneously were reducing their investment. A private sector financial deficit from 2004 to 2008 transitioned to a large surplus of savings over investment that exceeded $1 trillion by early 2009 and has remained above $800 billion as of September 2012. Part of this investment reduction related to the housing market, a major component of investment.^[1]

Economist Paul Krugman explained the consequences of this savings surplus during December 2011: "This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, and a slump in business investment due to lack of customers. Given this reality, it’s not hard to see why massive government borrowing hasn’t led to soaring interest rates; we’re awash in saving with no place to go. And that’s also why we’re in a liquidity trap, in which large increases in the monetary base don’t lead to inflation. And the question is, how do people who want us to slash the budget deficit 'now now now' think this is going to work? Unless the confidence fairy arrives, causing households and businesses to suddenly ramp up their spending despite high unemployment and weak sales, deficit reduction will only intensify the problem of excessive savings relative to perceived investment opportunities — and make the slump much, much worse."^[2]

Economist Richard Koo described similar effects for several of the developed world economies in December 2011: "Today private sectors in the U.S., the U.K., Spain, and Ireland (but not Greece) are undergoing massive deleveraging in spite of record low interest rates. This means these countries are all in serious balance sheet recessions. The private sectors in Japan and Germany are not borrowing, either. With borrowers disappearing and banks reluctant to lend, it is no wonder that, after nearly three years of record low interest rates and massive liquidity injections, industrial economies are still doing so poorly. Flow of funds data for the U.S. show a massive shift away from borrowing to savings by the private sector since the housing bubble burst in 2007. The shift for the private sector as a whole represents over 9 percent of U.S. GDP at a time of zero interest rates. Moreover, this increase in private sector savings exceeds the increase in government borrowings (5.8 percent of GDP), which suggests that the government is not doing enough to offset private sector deleveraging."^[3]

Economist Laura D'Andrea Tyson wrote in June 2012: "In the wake of the real estate bubble and ensuing financial crisis, the private sector has curtailed spending to reduce debt and rebuild assets. The result has been a significant and sustained contraction in private demand, reflected in a sharp and unprecedented swing in the gap between private saving and investment from an average deficit (investment exceeding saving) of $267 billion in 2005-7 to an average surplus of $789 billion in 2008-11. This implies a large drop in private demand of about 7.4 percent relative to G.D.P. in 2008, when the recession took hold."^[4]

Note: The graphic cited in the Krugman source material represents the difference between the two variables graphed in this wikimedia entry.

Krugman revisited this with a similar analysis in April 2013, showing the private sector and government deficits as nearly offsetting.^[5]

Source data series

The chart uses the following two data series from the Federal Reserve Economic Database (FRED):

• FRED Database-Gross Private Savings
• FRED Database-Gross Private Domestic Investment

References

Ceadúnú

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