The Fallacy of Composition and the Predicament of Debt

The Keynesians and monetarist economists are wrong in trying to stimulate consumption during downturns by fiscal spending and lowering interest rates. Deleveraging is bad in short term but good for the long term as the increased household and corporate savings is channeled into investments in nation's real capital stock, not into unproductive real estate or financial sector. The only productive government spending is in infrastructure (e.g. Indonesia) not in bailing out banks, corporations and households.

Macro economists and investment strategists should monitor the trend in savings for households and overall savings trend for the economy - especially for developed economies. A rising savings/income ratio means consumption/income will automatically fall (Disposable Income = C + S) but eventually build a base for higher domestic investment (e.g. the US where household savings ratio has improved but unless government deleverages and withdraws the fiscal stimulus of sustaining a budget deficit, households will have little incentive to increase savings further in an environment of artificially low yielding savings deposits).

The asset-based wealth effect through elevated property markets (China, Spore, Malaysia) may also play a role in encouraging households to increase debt levels but this is also not productive for the economy. Countries with loan/deposit ratios below 100% and manageable inflation (e.g. Malaysia) may have more room to grow but the leverage should be driven by well managed corporates rather than households.