9 thoughts on “Italy: Aging But Saving?

  1. I take it the deafening silence means no-one knows quite what to make of this.

    Meantime the Commission is moving forward with disciplinary action over the Italian debt.


    This one on the Lega, is also worth a read:


    The justice minister has said they are proceeding with plans to mobilise for a referendum, as the FT comments:

    In so doing, they have taken a line completely at odds with a fundamental point of government policy, but at no apparent risk to their jobs.

    Perhaps the reason, as I am suggesting, lies with Berlusconi himself:

    “In this sense, the league’s campaign blends with one element of the election strategy of Silvio Berlusconi, prime minister. He says Mr Prodi’s government fixed the lira against the euro at too high an exchange rate, a problem compounded in Mr Berlusconi’s view by the euro’s subsequent strength against the dollar and by the European Central Bank’s monetary policy.”

    “Opinion polls show the Italian electorate still has doubts about the euro’s advantages. A Eurobarometer poll in November showed 64 per cent of Italians had either ?a lot? or ?some? difficulties in handling the euro the highest level in the 12-nation eurozone.”

  2. Italia has to much inflation which means when you have the same currency that you prise yourself out of the market

  3. There should be no silence but much applause for the post is superb. I am at least close to agreeing, but must argue with myself a while more. Nice.

  4. Anne

    I have been reading your comments on Brad de Long’s page for quite a while now.

    You seem to be a very interesting woman.

    Do you have a picture of yourself?

  5. “Italia has to much inflation which means when you have the same currency that you prise yourself out of the market”

    This is clear. It is also true all along the Mediterranean fringe: Portugal, Greece, Spain. When the construction boom ends, Spain will be completely uncompetitive.

    For some time we were told that this above average inflation was due the the operation of something known as the Harrod-Balassa-Samuelson effect, but my guess is that there is something much simpler at work: credit which is too cheap fuelling the inflation.

    The whole point I am trying to make here is that behind the theatricals lies a sorry reality: the Italian economy has deteriorated significantly in recent years, the country is in debt ‘bigtime’, deep structural and demographic problems are only going to make matters worse, and it is not clear how any of the proposals currently on the table (the excess deficit procedure eg) are really going to turn the situation round.

  6. Edwrad, you said…

    “Perhaps before signing off here, and letting you get onto the McKinsey material, I could suggest why *I* think it is that there is so much liquidity, and such strong downward pressure on long term interest rates: simply put, for the reasons Bernanke suggests. Increased savings supply on the one hand, and diminished investment opportunities on the other, demand, side”

    Not sure I follow this economic reasoning. If people save more (a higher saving rate) this does not increase “liquidity”. It just reduces consumption demand (a flow). Similarly, low investment reduces overall demand.

    To talk about liquidity though you have to talk about asset stocks, and portfolio shifts. Liquidity is about asset stocks. Part of the difficulty in interpreting exactly what Bernanke is talking about is that it is not clear always exactly whether stocks or flows are the “drivers”.

    If the US runs a deficit then, by definition, the net increase in US assets held by those outside US the over a period counts as ‘saving’ to them – but this is just an accounting identity and does not tell you anything (behaviourally) about why the deficit came about. For that you have to look at the shifts in stocks and flows and the behaviour that underpins them.

    As I see it there are two (at least) mechanisms in the savings ?glut? story – one related to stocks, and one related to flows.

    The first possible story (stocks) is the ‘big pool of money’ theory – that there was a big pool of money ‘out there’ that decided to land in the US, driving up the exchange rate, lowering interest rates, and allowing a US consumer boom as part of an asset allocation adjustment by the ?rest of the world?. Here the savings “glut” is another term for excess demand for US assets.

    The obvious question though is – where did this excess demand for assets come from? In other words, how come the ?rest of the world? found its portfolio in disequilibrium and decided to effect a massive shift into US assets, driving down yields and kicking off a boom? Well – to dig deeper you have to ask: Who holds these US assets? Why have they chosen to increase their holdings? Is this really an active or a residual shift into US assets?

    The second (flow related) story is the ‘structurally spendthrift american’ story (or the structurally thrifty foreigner story?). Here we see the US consumer, buoyed up by the good years of the 90s and a serial liking for imported goods racking up huge bills on credit, while demand elsewhere is sluggish, and the rest of the world accumulates dollars by default. Here the savings “glut” essentially means that others are not spending enough.

    The mechanisms are not mutually exclusive of course – both mechanisms can be in operation. But what I don’t see is how higher saving rates elsewhere in the world generate additional “liquidity”. It reduces demand. Sure. But how does this create liquidity?

  7. “Not sure I follow this economic reasoning.”

    Wow, this really is a thought-out question. I’m going to have to work hard here :).

    OK first off, we’re all just guessing. At this stage of the game there is no ‘right answer’ to the question, because, I suspect, we dont understand it well enough.


    I want to make it clear I am not trying to resolve the problem of the US deficit, I really haven’t gone into the problem sufficiently, my focus is elsewhere. I resist buying into the ‘washington anti-consensus’ arguments, since I don’t think that’s the best way to do science. So for me it is still an open question whether or not the deficit is sustainable, probably we will only find out by waiting and seeing, since it isn’t clear what – apart from plunging the US into recession – can be done to put a brake on it.

    Now 1 simple item of data: the median age of the US population is only 37, and it is only projected to rise by one year (to 38) by 2024. The Italian median age is 42, it has risen 7 years since 1986 and will increase 9 more (to 51) by 2024.

    The difference between these two societies is huge. In fact the US is fundamentally different from all the rest of the OECD in this sense.

    Now I guess you know this paper:


    I think it is pretty relevant for addressing the issues you raise.

    “where did this excess demand for assets come from? In other words, how come the ?rest of the world? found its portfolio in disequilibrium and decided to effect a massive shift into US assets, driving down yields and kicking off a boom?”

    Well it doesn’t only come from one place. Brad Setser has drawn attention to the extent of the ‘oil bonus’ that has accumulated, that would be one part of the picture. Then there is the flat internal consumption (for the high median age issue) in the other OECD countries (by and large, obviously there are differences like the UK). Then there is China, and this is where Dooley et al is relevant. Effectively the Chinese seem to be buying US treasuries as a sort of insurance payment, not to attract FDI, which they don’t explicity need (they need the technology and the management skills that comes with it) but becase the tie-in with the US gives domestic savers the confidence to invest. In China the worry isn’t that the US will crash, it is that China will crash. This IMHO is the more reasonable worry, although if the US keeps on giving its guarantee (that’s it the treasuries are a kind of payment for a ‘good will’recommendation) then China can go on at the present rate for another decade or so.

    Of course, whether it is in the US interest to let that happen is another story.

    “The second (flow related) story is the ‘structurally spendthrift american’ story”

    Well this is the other side of the median age coin. You have a ‘younger’ society. That society has the expectation of earning a lot more in the future than it is at present, so it is prepared to borrow, and in large quantities. This is perfectly reasonable. Again the UK has done something similar, and is a younger society than most continental european ones. I mean there are obviously other issues, I’m not a ‘one tin drum’ person, but I amtrying to follow a line of reasoning. The US has still a much higher rate of new household formation than say Germany and Japan, so that is bound to produce construction pressure (Kuznets used to write about this). So I’m not using words like spendthrift and thrifty since for me they belong to a school of Austrian economics that I’d rather forget (and in the end Stephen Roach prefers to remember it). Economics is not about morality, at least in this sense it isn’t.

    So we have two major imbalances (or three if you count the ‘oil producers’, none of whom are really on the same sort of path as China or India). We have the China-US imbalance, and we have the ageing OECD consumption light/savings heavy story.

    This has all been a bit of a stream of consciousness muddle, I hope I have dealt with at least some points, please feel free to come back :).

  8. Thanks Edward, I (and others I’m sure) appreciate the effort you put into responding to posts. Apologies for the long post. I was really being a bit of a geeky economist.

    My basic point was really that I find most discussions that introduce the word “saving” to be unclear on the causality. Bernanke’s “savings glut” thesis has done little but sow confusion, even in the econo-blogosphere.

    In the passage I quoted you refer to higher saving creating “liquidity” as an explanation for low interest rates. I was really taking issue with that, as I don’t see the mechanism.

    As I understand it, liquidity is created by credit or debt growth. Differences in saving rates just distributes a given amount of liquidity round the system (cash/bonds moving from pocket to pocket) as people exchange paper for goods.

    In fact, I think one can argue that a spendthrift america is creating massive amounts of new liquidity through credit expansion which is then seeping abroad into the hands of those who are willing to hold it at low rates of return (asian central banks).

    In this view the additional liquidity is not a consequence of higher saving outside the US (a line of reasoning I don’t follow), but rather a consequence of very rapid debt expansion in the US, directly linked to an extremely low saving rate.

  9. A quick addition to get back on track. I see the argument of course that the differences in savings rate (amongst many other things) partly reflect demographic differences. The italy number you gave is extraordinary. It’s a very interesting avenue og enquity.

    Though I think the US savings rate is extra-ordinary, whatever the demographics. I don’t buy the argument that this is all a smooth adjustment along some inter-temporal optimal path. On that point I fall in the Roubini camp :)

    Thanks for the dooley link – not read that.