GWD 12-37

Many economists believe that a

           high rate of business savings in the

           United States is a necessary precursor

Line    to investment, because business sav-

  (5)  ings, as opposed to personal savings,

comprise almost three-quarters of the

national savings rate, and the national

savings rate heavily influences the

overall rate of business investment.

(10)  These economists further postulate

that real interest rates—the difference

between the rates charged by lenders

and the inflation rates—will be low when

national savings exceed business

(15)  investment (creating a savings surplus),

and high when national savings fall

below the level of business investment

(creating a savings deficit ).  However,

during the 1960’s real interest rates

(20)  were often higher when the national

           savings surplus was large.  Counter-

           intuitive behavior also occurred when

real interest rates skyrocketed from

2 percent in 1980 to 7 percent in 1982,

(25)  even though national savings and

investments were roughly equal

throughout the period.  Clearly, real

interest rates respond to influences

other than the savings/investment

(30)  nexus.  Indeed, real interest rates may

themselves influence swings in the

savings and investment rates.  As real

           interest rates shot up after 1979, for-

eign investors poured capital into the

(35)          United States, the price of domestic

goods increased prohibitively abroad,

and the price of foreign-made goods

became lower in the United States.  As

         a result, domestic economic activity

(40) and the ability of businesses to save

and invest were restrained.