A savings glut, not an investment drought -
So argues Ben Bernanke.
His basic argument is very simple.
The emerging world now has a large and growing current account surplus that finances a large and growing current account deficit in the world’s industrialized (or perhaps formerly industrialized – no advanced economy, with the possible exception of Germany, is as industrialized as China is now) economies.
From 1996 to 2004, some of the rise in the emerging economies aggregate current account surplus came from a collapse in investment in southeast Asia.
But some also came from a rise in Chinese savings – which even then was beginning to push China’s current account surplus up. Chinese savings was even then rising faster than Chinese investment, for reasons what remain poorly understood. Some think the rise is tied to the policies China adopted to support its dollar peg, particularly after the dollar started to depreciate. Others emphasize weakness in China’s financial system (which limits access to consumer credit) and the lack of a modern social safety net.
And some came from a rise in the savings of the world’s commodity exporters, fueled (literally) by the rise in the price of oil.
In 2005 and 2006, though, Dr. Bernanke argues that there really can be no argument.
Much of the rise in the emerging world’s overall surplus came from a roughly $200b rise in China’s current account surplus. China clearly doesn’t suffer from a shortage of investment. The surge in its surplus comes entirely from a surge in its savings, one that exceeded a large increase in Chinese investment.
And the rest comes from a rise in the surplus of the oil-exporting economies. And there too investment has picked up (just look at the skyline of Dubai, or Moscow). But with oil rising steadily, the oil-exporting economies were able to spend more, invest more and still save more. Oil may be a curse if oil sells for $20 a barrel (or less), but it sure doesn’t seem to be a curse at $70 a barrel.
Dr. Bernanke makes two additional points –
First, over the past two years, the US hasn’t been the sole counterpart to the emerging world’s rising surplus. Europe has also played a growing role in absorbing the emerging world’s surplus. The eurozone’s small ($100b) surplus in 2004 turned into a small deficit in 2006, and non-eurozone European economies chipped as well. The swing in the current account balance of industrialized economies outside the US was around $140b. The US still did the heavy lifting though – its deficit increased by around $170b.
Here it is worth noting that Europe also increasingly enjoys the largess of the emerging world’s central banks. Talk about how the euro will never be a global reserve currency misses the point. The euro already is a major global reserve currency. Central bank inflows into the eurozone are now far bigger than central bank flows to the dollar in the 1990s – or for that matter in 2000 and 2001.
Second, the rise in the emerging world’s savings surplus over the last two years wasn’t associated with a fall in equilibrium rates in the US and Europe. This, Dr. Bernanke argues, is evidence that investment demand picked up in the US and Europe.
That is right – though an awful lot of that investment was investment in residential real estate, in Europe as much as the US. Spain’s real estate boom puts the US boom to shame (check out these old posts by Charles Gottlieb). The fall in the US deficit over the past two years also helped. And it is of course possible that the policies of the Fed and the ECB also played some role in pushing up US and European rates over the past few years – though with long-rates below the short-rates set by central banks, there is a strong case that global forces mattered more. Think of it this way: the Fed sets US short-term rates, the PBoC sets US long-term rates and the Bank of Russia increasingly sets long-term European rates.
I would endorse Dr. Bernanke’s analysis but for one point.
He – along with other US policy makers – continues to minimize the role the official sector has played in the intermediation of the global savings glut. The US current account deficit is, he argues, mostly a market phenomenon:
These external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets. Of course, some foreign governments have intervened in foreign exchange markets and invested the proceeds in U.S. and other capital markets, which most likely has led to greater imbalances than would otherwise exist. But the supply of capital from foreign governments is not as large as that from foreign private investors. From 1998 through 2001, even as the U.S. current account deficit widened substantially, official capital flows into the United States were quite small. During the years 2002 through 2006, net official capital inflows picked up substantially but still corresponded to less than half (47 percent) of the U.S. current account deficit over the period. On a gross basis, during the same period, private foreign inflows were three times official capital flows. Moreover, even public investors are motivated to some extent by the attractions of the U.S. economy and U.S. capital markets."
The argument that emerging market outflows and the associated inflows are a market phenomenon, though, is increasingly hard to support. The recent increase in the current account surplus of the emerging world is almost entirely coming from China and the oil exporters — places where the "official sector" accounts for all the country's outflows. Contrary to the expectations of the Caballero, Gourinchas and Farhi model (which postulates that emerging economies would have trouble creating financial assets private investors would want to hold), the net private flow of capital is strongly toward the emerging world. China has had no trouble keeping its savings at home recently. Chinese investors prefer Chinese stocks to US stocks, and Chinese RMB to US dollars.
Indeed, official outflows from the emerging world (according to the IMF, and my own reserve tracking) top the emerging world’s current account surplus by a significant margin. China’s savings surplus is brought to the world’s financial markets courtesy of China’s central bank (and soon the CIC). Indeed, in aggregate, China's central bank uses capital inflows into China to finance its purchase of US and European bonds. The Bank of Russia, SAMA and the big investment funds of the Gulf – not private investors — carry the oil surplus to the US and Europe.
Moreover, the share of the deficit financed by the official sector has increased significantly recently. In q1, the BEA data indicates that the official sector provided 75% ($600b) of the roughly $800b in net inflows needed to sustain the US deficit.
And I deeply believe that the BEA's data actually understates official inflows. The US TIC data — which the BEA uses for its estimates — systematically undercounts foreign purchases of US bonds (and in particular Chinese purchases) relative to the Treasury survey. The BEA data on official inflows consequently tends to be revised up with a lag. The world’s central banks also have built up their dollar bank deposits offshore, indirectly helping to finance the US deficit. Finally, the US data – both the TIC and survey – do not capture all the activities of the Gulf investment funds or those central banks that use outside fund managers. (For more details, click here—RGE subscription required)
Dr. Bernanke also notes that official inflows are not all that large relative to gross capital inflows. But the overall total includes a lot of short-term cross border bank flows – think lending between Citi New York, Citi London and Citi Caymans. Those inflows are almost always offset by short-term outflows through the banking system. They don’t generate any net financing. The rise in gross flows is tied to the growing use of offshore centers and to be totally honest, tax arbitrage. To paraphrase Bill Walton, it is important not to confuse activity with results.
There is little doubt at this stage that central banks and investment funds have provided the overwhelming share of the financing the US has needed to sustain its $800b deficit over the last four quarters. This shouldn’t be a surprise. The IMF’s forthcoming data (the COFER data) will show – once the Saudis are added in – an over $1 trillion increase in central bank reserves over this period, and an awful lot of that increase is still flowing into dollars. China alone accounts for $400b of the total – and China’s share is still rising over time.
Dr. Bernanke certainly understands China's role in this process. Last fall, he correctly called Chinese reserve accumulation a de facto subsidy for Chinese exports. He also recognizes that the world’s large deficits (and surplus) are ultimately unsustainable, and that a rather large change in the global pattern of economic activity is required to bring the world back into balance.
“Adjustment must eventually take place, and the process of adjustment will have both real and financial consequences. For example, in the United States, the growth of export-oriented sectors such as manufacturing has been restrained by the shifts in relative prices and foreign demand associated with the U.S. trade deficit. Ultimately, the necessary reduction in the trade and current account deficits will entail shifting resources out of sectors producing nontraded goods and services to those producing tradables. The greater the needed adjustment, the more potentially disruptive and costly these shifts may be. Similarly, external adjustment for China and other surplus countries will involve shifting resources out of the export sector and into industries geared toward meeting domestic consumption needs; that necessary shift, too, will likely be less disruptive if it occurs earlier and thus less rapidly and on a smaller scale. ”
Dr. Bernanke sees signs the necessary adjustment could begin. He notes China’s rhetorical commitment to rebalancing the basis of its growth. Alas, so far, all signs suggest that China’s surplus is still trending up. Even if it stabilizes, it will stabilize at a very high level.
UPDATE: a slightly different take from Menzie Chinn.
Ben Bernanke is attempting to shift the blame for the massive misallocation of capital in the U.S. Economy to those awful foreign scapegoats, when the real issue has always been gross U.S. monetary policy mismanagement by the irresponsible Federal Reserve. Writes Portfolio magazine Contributing Editor John Cassidy,
http://www.nypost.com/seven/09122007/business/greenspan_in_trouble_for_doubl.htm
We can thank Alan Greenspan for the latest turmoil in the credit markets.
“By keeping interest rates too low for too long, he encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze,” Cassidy writes in the coming issue of Portfolio, which hits newsstands next week.
“By failing to crack down on the mortgage industry, he allowed subprime hucksters to peddle dubious loans, which the financial industry’s math whizzes packaged for investors.”
Based on his experience during the dot-com boom and bust, Greenspan should have known that “the best way to control a speculative boom is to prevent it from developing in the first place,” Cassidy adds.
“For a Fed chairman to have one speculative bubble inflate during his tenure is an indictment; to have two of them qualifies him as a serial bubble blower.”
DC, in a global economy, the policy choices of other countries can have an impact on the uS. I initially didn’t like the savings glut thesis b/c it implied that w’s deficit was responsible for the US current account deficit. but i think the data now supports the savings glut thesis. The fed raised rates from 04 on, and long-rates didn’t move much. You can blame the fed for holding short-term rates too low for too long, but not for the low level of long-term rates there. that is a consequence (in my view, and that of Dr. Bernanke) of the other country’s policies.
China’s decision to peg to the $ and run up a huge current account surplus has real consequences, not just for China but for the global economy. ditto for the policies of the oil exporting economies.
Could the US have lowered interest rates to promote a weaker dollar hoping to curtail imports (both consumer goods and oil)for the various benefits of cutting back China growth and oil consumption in US? I am always surprised we never hear talk of defending the dollar on nightly news. This was common in the 60’s and 70’s when they also always reported gold prices.
Stephen H –
now that the $ floats, the US has no obligation to protect the buck’s external value. back in the 60s the $ was pegged to gold through bretton woods, and the Us had an obligation (in theory) to maintain the $ price of gold.
at this stage in the cycle, the us has a strong interest in a weaker $. i think martin wolf gets this right in today’s financial times. the US certainly won’t start defending the dollar now. basically it relies on China and others to prop up the $, at a considerable cost to their central banks and their economies.
“…China’s fault is that it has become a factory that imitates rather than innovates, and whose productivity is based on forfeiting international trademarks. Its economy is simply building assembly plants and this keeps it far behind the ranks of industrial economies that generate hundreds of innovations and creative products every year… Another reason to worry about China as it takes on globalization is that its banking sector which increasingly adopts western systems, is governed by a central bank that is monitored by the ruling party that does not encourage innovation… China’s banking sector, however, will be more of an unlimited black hole once crisis strikes. In fact, concerns about China’s banks have already surfaced, as the lack of transparency and the worries about mounting bad debts put them in a far more precarious rating position in contrast to their foreign counterparts…” http://english.daralhayat.com/business/09-2007/Article-20070911-f4a09362-c0a8-10ed-00c3-e8c472a4ae70/story.html
How many times do I have to point out that the US has always had the following alternative options to respond to China’s dollar intervention:
(1) selling dollars to increase its own reserves
(2) directing the capital inflows to investment rather than consumption
(3) imposing its own capital inflow restrictions on China specifically
Basically it suited them to throw a party - ie consume more - instead!
Having the highest per capita income of the large countries, the US can pay back in undebased dollars what it borrowed, and I think that morally it should.
An argument that is often raised is that if the US does not consume, global economic growth will slow. I would be grateful if someone could explain this rigorously to me……most explanations seem to regard saving as a leakage of resources, but this cannot be right, because in order for someone save, someone has to borrow and they will not borrow without a use for the resources, no?
Brad,
The low level of long-term rates is primarily a result of the huge growth of credit derivatives, while reducing the credit risk profile for an individual lender by spreading risk, also resulted in a systemic explosion of riskier debt securities across the planet. The complexity and obfuscatory nature of much of the so-called structured finance permitted U.S. credit rating agencies to assign AAA rating to toxic waste: credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP, etc. Debt piled on debt everywhere in households, corporations, public finances and international deficits, in magnitudes that had never been even imagined before. Most of the U.S. financial services industry has thrived in a booming market in which more money flows into the schemes than goes out, so there is a Ponzi element in much of current creative financial enterprise that makes its collapse as inevitable and potentially as destructive of value as the subprime mortgage debacle has been. Thus, Wall Street will be granted its wish for a “cheap” money monetary policy from the pliant Federal Reserve at the destruction of the U.S. dollar currency.
Rebel — for a while the US followed your advice:
“directing the capital inflows to investment rather than consumption”
it just directed the inflows into residential investment more than other kinds of investment.
that sort of makes sense too. if china is keeping the rmb, it makes sense to produce tradable goods in china, which implies that investment outside china will be biased toward other sectors.
and i would love to see the US build up its RMB reserves. China, however, won’t let the US borrow in $ to buy RMB (those pesky capital controls).
“…on the uS. I initially didn’t like the savings glut thesis b/c it implied that w’s deficit was responsible…”
Not to be petty, Brad, but your careless writing sometimes makes your posts more difficult to decipher than they should be. I can get “uS” okay, but I have no idea whose deficit “w’s deficit” is. Who or what is “w’s”?
george w bush
BLOG: “I think the data now supports the savings glut thesis”.
Comment: Massive investment is needed in the Developping countries to provide employment to millions; by means of projects aimed at construction of infrastructure; building schools and hospitals; provide scholarships so that the underprivliged have oppotunities to access education, science, and technology, and; to combat pollution and global warming. In the USA alone, massive investment is need to rebuild infrastructure, including bridges. Should not the best minds, together with CEO s of transnationals, and Heads of Government worldwide, organize to design a new world order, where human beings are at the center and savings glut is mobilized in favor of mankind? Maybe a new Lord Keynes is need for the globalized economy: “supply does not automatically create its own demand”.
to be more clear, i’ll try to write out dubya …
DC — i think the evidence suggests that central bank demand has played the key role in holding down long-term risk free rates. the rates for other kinds of products are a function of the risk free rate and the spread - -and i would agree that the explosion of CDOs and the like contributed to the fall in risk spreads.
Hi all,
I have posted a comment on Bernanke’s speech on my blog, I’ll summarize it here.
First, I think Bernanke has finally embraced two main bits of criticism that some commentators raised against him after the 2005 speech: a) that there has been no US investment boom in the US which could have attracted foreign capital flows (indeed, Bernanke now speaks of an “almost unchanged” investment rate for 2000-2004); b) that foreign investors will possibly get tired of accumulating low yielding US Dollars. I’m quite sure both of these points were first raised by prof. Roubini (especially the second: ‘you can fool everybody for some time…’)
Second, there still are some points in Bernanke’s theory that do not entirely convince me:
a) –as Brad correctly pointed out above– Feldstein (in ‘Uncle Sam’s bonanza might not be all that it seems) famously reported that US capital inflows may be less privately driven than the common wisdom believes.
b) Dr. Bernanke says: “there is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period,”
but Veronique de Rugy (in a paper of Cato Institute quoted by The Economist) reported that US government “discretionary spending rose 64% over the years from 1998 to 2004″.
And finally c) Dr. Bernanke says:
“the U.S. investment income balance, which essentially represents the debt service on the NIIP, remains positive, at least for now. Thus, even after years of current account deficits and corresponding increases in net liabilities, the United States continues to earn more on its foreign investments than it pays on its foreign liabilities”.
I know it may not be a good idea to talk extensively about Dark Matter especially on this blog, but I find it hard to understand how a Central Banker can rely on such an insignificant number as the Net income payment (NYP) data. Higgins et alia have pointed out that the historical mean error of such data is greater than the NYP amount reported for year 2005. NYP may now be positive or negative with the same likelyhood (goes without saying: we could hardly base an operation of NIIP re-calculation on such an insignificant value; but Hausman-Sturzenegger did).
Regarding point a): if foreign investors were privates, optimism about forein financing would be understandable. But they aren’t. On the contrary, we should expect future policy deviations by central banks towards adopting other currencies (such as probably Euros, which rely on better forecast).
Bernardo
Love your articles Brad. If you are worried you comment too much on where petrodollars go or Chinese investment, do not. This reader enjoys them. I was initially skeptical and distrustful of Helicopter Ben, but he’s winning me over. Then again, I am a pleb, so what does that matter?
I have also grown to love any China post you put up as it requires Dave Chiang to vehemntly defend China’s political leaders and react in a way that would lead one to believe he considers any commentary that might be slightly negative towards Chinese policies as an affront to the people of China.
Debt piled on debt everywhere in households, corporations, public finances and international deficits, in magnitudes that had never been even imagined before.
DC,
I don’t disagree with this, but, in theory people taking on more and more debt should cause interest rates to go up. Not down. When demand for debt goes up, yields go up. The converse is also true. This is economics 101 stuff. Once again, your aguments hold no water. Brad is absolutely right about the FED raising rates didn’t lift long term interest rates (This is Greenspans famous conundrum). The reason long term rates didn’t go up was because dollar pegging countries (China, Saudi Arabia, …) had an ample supply of USD they were willing to lend. They greatly increased the supply of USD to be lent. This has been, IMO, one of the primary drivers for the current housing bubble.
” The low level of long-term rates is primarily a result . . . ”
i see a simple connection between willingness to borrow and low interest rates. each tends to increase the other - low rates are attractive, and increased borrowing/lending spins more money into existence.
usually the surplus of money leads to inflation -
so what has cooled off the potential inflation ?
1 outsourcing has cooled off wage increases, in fact slashed wage content in the price of certain goods.
2 tax breaks for the u s rich diverts consumer inflation into asset inflation, because the rich buy different stuff,
3 while the american/european middle classes have been kept quiet with property asset inflation - increased wealth on paper. (this asset inflation being excluded from the official inflation statistics).
4 the general borrowing/lending (blending?) zeitgeist leads to complex devices like the derivatives that help to smokescreen the risks of gambling on the continuation of the ponzical boom.
now if all this excess can be indulged in, in the boom, without sparking off consumer inflation, then the risk of deflation, japanese style, must be considerable on the reverse slope ? the real balancing factor needed in the u s economy might be a decade of left wing government. where is that going to come from ?
the ‘imbalance’ chinese savings v. american debts, is being used to distract attention from the deliberately fostered imbalances between the remuneration given to CEOs and the remuneration given to their workers.
this is not meant to be ideological, just common sensical. the point has come in ireland too where the millionaire property developer cannot pay the bank because the first time buyers cannot pay his prices. china can see it. keep the customer solvent. but u s government policy cannot see it.
henry ford could see it. the workers need to be able to afford the car they produce. anything else is economic fantasy.
so you need a dose of democracy.
a system in which the political scene is dominated by the biggest suppliers of campaign funding, has a democratic imbalance. don’t blame greenspan. if greenspan did not exist such a system would produce one.
a government learns to pretend to be solving the problems that it is in fact creating.
lowering of interest rates will not correct imbalances - what comes after zero per cent ?
low interest rates are creating blending that creates consumption that ends up posting the dollars to china and russia. when the consumers are bled dry - the zeitgeist will change.
Oh my god, Oil is above 80$ !!!
http://www.bloomberg.com/apps/news?pid=20601087&sid=apto5.w67Gws&refer=home
Come on Charlie, how has the China PBoC increased the monetary supply of US dollars. Unless the China PBoC has an underground printing press like the North Korean regime, isn’t it fair to state that every single US Dollar in Chinese Central Bank reserves was at one point printed by the US Federal Reserve, the only agency legally authorized to print the US currency. A global liquidity glut of US Dollars is the sole creation of an irresponsible US Federal Reserve. Period.
w’s more efficient - shorthand doesn’t = carelessness
“…It may be the case that the elusive $20 to $30 trillion stat from ADB is a “need” based statistic rather than an actual “demand” based statistic. It seems to me that if I were an analyst, I could define “need” in a great variety of ways - it is such a subjective concept. For example, on one extreme, an analyst could assume that “need” encompasses only the provision of basic shelter, water, sanitation, etc.; whereas a more optimistic analyst might assume that all east Asians “need” infrastructure services at levels now common in the West. And given that ADB is in the business of providing infrastructure loans, their analysts may tend to be more optimistic in their assumptions…” http://crgp.stanford.edu/news/global_projects_world_infrastructure_demand_85_trillion_over_10_years.html
Wish I could post it, but a Chinese Foreign Ministry official, Sha Zukang, admonished Neo-liberalism advocate Thomas Friedman at a Dalian China conference after Friedman accused Beijing of being a “free loader” in the international system, letting the United States carry the burden of global “guardian” by itself. Angering Thomas Friedman, the Chinese diplomat stated that China believes that countries should not assume world leadership but be elected to it. Beijing, he noted, treats all others as “equals.” China, therefore, is not going to lend a hand to the United States—or any other nation—for global military or economic interventionism into the internal affairs of any sovereign nation. Perhaps Thomas Friedman should reconsider his idiotic “the world is flat theory”. Hillary Clinton, are you listening?
re: gillies on 2007-09-12 13:51:42
“…The bilateral deficit keeps rising, because China undervalues the yuan, and this makes Chinese exports artificially inexpensive and U.S. products too expensive in China… China’s huge trade surplus creates an excess demand for yuan on global currency markets; however, to limit appreciation of the yuan against the dollar and drive its value down against the euro, the Chinese central bank purchases about $250 billion in U.S. and other foreign currency and securities each year. This comes to about 9 percent of China’s GDP and about 25 percent of its exports. These purchases provide foreign consumers with two trillion yuan to purchase Chinese exports, and create a 25 percent “off budget” subsidy on foreign sales of Chinese goods, and an even larger implicit tariff on Chinese imports. In addition, China provides numerous tax incentives and rebates, and low interest loans, to encourage exports and replace imports with domestic products…” http://www.finfacts.com/irelandbusinessnews/publish/article_1011120.shtml
Gillies –
well, given that “W’s” little adventure in the middle east hasn’t exactly helped keep oil prices low, let alone further the cause of “democracy”, China might be tempted to give your advice a go at some point ..
“time to ask commonsense questions about ‘global imbalances.’ maybe if china was allowed to start a costly imperial war, things would even up ?”
that said, i long have felt that the puzzle was that the costly little quaisi imperial (in a sop to nial ferguson, a liberal imperial way) war didn’t stand in the way of low interest rates and host of leveraged bets that hinge on low interest rates (housing, LBOs). that combination does suggest — at least to me — than bernanke had a point. normally borrowing to finance little wars pushes up interest rates, and stands in the way of a housing and debt led boom.
we should be asking why China felt it was in its interest to finance the united states little war as well.
anonymous — thanks for the encouragement; always appreciated. tis hard to tell if folks are interested in what you write, even with a blog.
My contrary view -
The global savings glut thesis observes and interprets historically low real interest rates as evidence of the glut. This ignores a few things. Real rates might be low because inflation risk premiums embedded in real rates have fallen considerably over the past 10 years. That is consistent with dramatically lower realized inflation rates. It is also consistent with the experience of Japan with actual deflation, and the shaping of US fed policy several years ago according to perceived deflation risk. This is why Greenspan took the funds rate to 1 per cent. Once the rate was 1 per cent, the yield curve was extraordinarily positive. Where was the glut monster then? Why didn’t it drive bond rates lower relative to the funds rate? Why did the glut only begin to exercise its conundrum powers as the Fed proceeded through its tightening cycle? Why was the operation of an interest rate dynamic that presumably was the child of the glut so dependent on the actual path of the funds rate?
The role of US domestic financial institutions and Fed policy are regularly ignored in the recycling dynamics of the US CA deficit. The original financing for the US CA deficit comes from US institutions - not from overseas. It is the dollars that are supplied initially as US credit that are then moved overseas through the deficit and then recycled back through Treasuries, etc. It is Fed policy and domestic financial institutions that have anchored the capability for the US consumer to finance this demand - not the knock-on overseas recycling of dollars back into available US financial assets. The US institutional framework is the dog - the overseas recycling framework is the tail. This is hardly the work of a global glut.
The glut thesis rarely mentions the size and trend of global savings and global investment relative to global GDP - this seems more the equilibrium issue than the distribution of imbalances - after all, the global sum of all CA surpluses and deficits is tautologically 0. And it’s questionable that the savings glut is global - it’s labeled as such from a US-centric perspective. Why shouldn’t the non-US perspective shape a corresponding global dissaving glut thesis and conversely why does the US perspective determine the global characterization of an obviously non-global asymmetry? These ‘global’ savings surpluses would simply not exist without corresponding CA deficit activity led by the USA. Capital inflows offset capital outflows or CA deficits. But capital inflows don’t force CA deficits. This inverts the true causality. The USA hasn’t been forced into a deficit position by a ‘global’ or any other kind of foreign surplus.
Come on Brad, while the Bush Administration war in the Middle East was really for the oil reserves, the conflict doesn’t come close to crossing the line in the sand for the Chinese. The Chinese have never been a major player in the Middle East, and outside of Iran, they are essentially locked out of the Gulf Arab region both militarily and economically. If the foreign policy Neo-con radicals in the Washington Beltway had their wish, a formal declaration of Taiwan Independence would be an entirely different story. Then missiles and bombs would really be flying across the Pacific ocean. Actually despite the bravado of US Navy officials, I seriously doubt the US Aircraft Carrier battlegroups could survive a gauntlet of over 50 attack submarines, 3000 Fighter jets, stealth fast attack boats, hundreds of guided ballistic missiles, and literally thousands of sizzler anti-ship missiles to defend Taiwan. Even the Stealth F-22 Fighter would soon run out of missiles and bullets when faced with a 50-1 ratio.
Dear Professor Setser,
Let me add my thanks for your posts and for many of the comments. I read the RGE site blogs daily (along with several other economics sites–I who am a philosopher) and think I profit from it and them at least in terms of greater understanding of this interesting world we live in. This to add more encouragement to that of anonymous.
I differ with you on “capital inflows don’t cause a current account deficit” –
you can tell a story where more domestic spending (or bigger fiscal deficits) pull in capital from abroad, but that is a story that is consistent with high not low real rates.
the alternative story is one where the easy availability of credit (including credit from abroad) induces more borrowing (whether for investment or spending) and thus induces a bigger deficit. that is a story more consistent with low real rates.
at different times, the causality can run in different ways
Professor Setser,
I find your posts are very interesting,
though I comment rarely.
This time, however…
I don’t think Bernanke explained why the savings-glut affects the US in particular.
It seems to me that if the low US savings rate had external reasons (asian/opec savings glut), those reasons should affect Europe and Japan as well.
However, their savings-rates are well above those in the US, despite low interest.
So, shouldn’t most of the origin of US dissaving be some internal factor?
http://www.theglobeandmail.com/servlet/story/LAC.20070912.RHEINZL12/TPStory/Business
As a former Wall Street insider, Mr. Talbott has a better appreciation than most for how large financial institutions operate. There now is a massive effort to conceal the extent of the toxic sludge buried beneath some of the biggest names in the business.
“Everybody is hiding and not disclosing losses,” he says. “They’re all winking and nodding at each other because they’ve all got this toxic stuff on their books.”
With 40 per cent of some banks’ assets invested in residential mortgages, they won’t be able to conceal their losses forever. Faced with rising defaults, banks are already pulling back on lending. The lack of credit, in turn, will exert a major drag on the economy, which for years has been fuelled by easy money. That’s why Mr. Talbott says a recession in the next 12 to 18 months is a certainty.
Banks most at risk for failure are those with a concentration of residential mortgages in Florida, California and New York, where prices rose the steepest and will fall hardest, he says. But even some of the biggest U.S. banks could be at risk, he says.
The subprime meltdown has been described as a liquidity squeeze, which makes it sound like a temporary problem that can be cured with an injection of cash. But the problem is far more serious, he says.
“Giving a bank more cash doesn’t solve the problem. What they’re sitting on is huge losses and they can’t recognize those losses without endangering their entire book equity and threatening bankruptcy and threatening a run on the banks.”
Brad–this story may sound even more compelling:
a tech-bubble has just exploded and FED rates are lowered. Meanwhile, Bush lowers taxes (please note: the budget deficit=war expenses is almost a myth. Actually non-military outlays increased by more than military ones, at least until 2004. After 2004, they both decreased substantially, also becuase the tax system introduced by ‘dubya’ implied a U-shape tax income over 5 years).
Of course tax and rate cuts weren’t meant to be adopted at the same time (after all Bush and Greenspan represent two very distinct entities), but so it happened that the recovery post dot com received “double help”.
Now, I don’t think that either dubya or Mr Caius (a random USA citizen) in person borrowed money from abroad, but probably the banks that lent them money did. So if world saving rates occur to be low, while the US rates are low as well, the probabilities for US citizens to save more obviously decrease (low rates+low rates=low rates). After all: why save money now, when borrowing has become so cheap? (This, I think, is also what the Bush administration thought when they decided to cut taxes).
This was Bernanke’s argument in 2005, and it still is his winning argument. What Bernanke fails to admit, in my view, is that the casues for this were entirely exogenous to the US. I may not agree. It might have been (also) Greenspan’s fault. But could (can) Bernanke say that it was his precedessor’s fault?
we should be asking why China felt it was in its interest to finance the united states little war as well.
The Chinese have been doing incredibly well by selling themselves to the developing world - particularly those rich in natural resources - as the Anti-US Ally. Ho has been sweeping through Africa, South America and the Middle East signing treaties assuring long term exploration, development and revenue sharing while promising that China would never intervene in domestic political conduct - however oppressive. As Chinese joint ventures are much more generous than the exploitative US industry-led model, China has been hugely successful in locking up long term supply deals at favorable prices.
Last year after enduring humiliation with Bush in Washington, Ho flew direct to Saudi Arabia where he signed eight treaties on development and joint investment with King Abdullah. The US blusters; China invests for the future.
In the meanwhile, the US military is destroying itself in Iraq and Afghanistan, the US domestic economy is about to collapse under the weight of excess debt and chronic misallocation of investment, and the US standing in the world is devalued by a reputation for arrogance, torture, extrajudicial arrest and detention, fraudulent intelligence, pre-emptive war and now - as more becomes known - massive financial fraud and market manipulation.
The Chinese have allowed the US to embroil itself in a land war in Asia. There is no more certain way to destroy an empire and weaken an economy.
My kids are studying Mandarin. That’s my hedge against the US collapse.
“…Beijing has charmed African rulers with a triple whammy of arms sales, cancelled debt, and soft loans… one of the main concerns is that the scramble for Africa is fuelling corruption, environmental degradation, and internal dissent… It reduces a state’s incentive to impose a free and just taxation system, and encourages corruption and acquisition of weaponry and thus develops wars…” http://allafrica.com/stories/200709020034.html
Robd –
the same external factors impacting the US are increasingly impacting Europe — note rising official inflows to europe, low european rates and high residential investment.
japan is a bit different as it has its own domestic savings glut.
bsetser: I differ with you on “capital inflows don’t cause a current account deficit”
- I guess I make a distinction between the availability of credit from domestic versus foreign sources, based on a difference in the nature of the flows. I associate domestic credit availability with active new credit extension to consumers and businesses, with associated money supply expansion within the US. Foreign credit availability seems different to me - less dynamic, in that it is correlated more with the recycling of existing dollars accumulated through surpluses into existing and relatively low risk financial assets for the most part.
Take China as an example. PBOC generates a pot of money through buying up dollars. When it buys treasuries or agencies or whatever, it is working from a liquid asset position - a supply of dollars that it needs to put to work. It’s not really creating new credit and new dollar money supply in doing so. This is a more passive form of credit availability, in that PBOC is often buying up existing financial assets through the secondary market and/or buying securities for the most part well down the risk spectrum. This is more portfolio rebalancing than credit creation. Even an investment in Blackstone represents dollar recycling and portfolio rebalancing rather than incremental credit creation.
US domestic banks are engaged in a more active form of new credit creation - the type that induces domestic consumers and businesses to spend widely, including through the current account. And I can certainly see aggressive lending activity being associated with low real rates - obviously it has been. And I agree that capital flows can induce a current account deficit, but my interpretation of capital flows in this context is credit extended by domestic banks to consumer and business bank accounts. The subsequent step in the credit transmission process is the expenditure of funds through the current account and then the recycling of them back through the international capital account. But this final stage of credit transmission is relatively passive in comparison to the first stage - it’s a matter of deploying dollar surpluses - not creating new credit. I see it as portfolio rebalancing - from cash into earning assets.
When US banks extend credit to consumers, they don’t do it on the basis of expecting to source the funds they need from China. They do it based on their own domestic liability management capabilities and activities. The money they create will cycle through China, but will return to the domestic banking system as money. Someone will sell a different financial asset to China in return for it. It’s a closed system globally. The money won’t disappear just because it cycles through China. The international banking system closes the loop and ensures that the funds are returned to the domestic banking system. The credit judgment of the domestic bank is not based on a reliance on China’s “willingness” to return the funds. That is ensured by the banking system. Nor is it based on a reliance on China to keep rates low. If China doesn’t buy treasuries, it has to keep its money in bank deposits - on which the banks set the rates - which they set in order to fund their loans at a profit margin. In this sense, the banks call the shots, and China’s surplus is captive to the US domestic system.
Financial Markets: the Need for Transparency
Let me begin my remarks by recalling the 2005-06 period, when many central bankers - including me - were becoming concerned with what appeared to be an excessive easing of credit conditions, or what was described as a “wall of liquidity” building up around the globe. What was creating this wall of liquidity? Well, as I mentioned the last time I was here, at its very base was a global excess of desired savings relative to desired investment. These excess savings were acting to drive down real longer-term interest rates, even during a time when many central bankers were raising policy interest rates.
- David Dodge, Governor of the Bank of Canada
http://www.bank-banque-canada.ca/en/speeches/2007/sp07-16.html
states the core thesis much more clearly than Bernanke in my opinion
JKH - Thank you for the very lucid and articulate counter to BBs savings glut POV. Much has been written in popular press and more focused rags, but you’ve splendidly unraveled it, and rather parsimoniously at that.
The real shame of it is that the worst could have been avoided were top marginal rates simply kept closer to 40% and a sensible energy policy akin to other OECD nations (your country excepted) emplyed. Even the lower marginal rates could hav ebeen stomached were if swapped for VAT-like consumption-oriented revenue raise.
Richard Duncan spells out how the dollar standard affects global trade.
French economist Jacques Reuff called the fiat dollar system “a childish game in which, after each round, the winners return their marbles to the losers”. Reuff was referring to the activities of the French central bank (for example) when it acquires dollars from French exporters in exchange for French Francs who have sold their goods to Americans for dollars but require Francs to pay their costs, then turns around and invests those dollars back in the U.S.
Without the ability to settle foreign exchange transactions in gold, the rest of the world had no choice but to continue to fund U.S. indebtedness with the proceeds earned from U.S. consumption. As the dollars return home, they enter the U.S. banking system, where they can serve as the base of the money creation pyramid resulting in U.S. credit expansion, which can fund more U.S. imports, thereby continuing the cycle.
I have a problem with the so called ’savings glut’. Roughly half of what the PBoC uses to purchase foreign debt with is freshly created Yuan (’unsterilized’). Ditto for most other central banks. This may be ‘liquidity’, but how can it be termed savings?
When the Fed buys Treasuries (as it does each month) with freshly created US dollars, does anyone have the nerve to call that saving?
Just want to point out that the biggest “misdeed doer” is the British for 1) misleading the U.S. into the Iraq invasion with the WMD claim in the first place not to mention pulling out all their British troops leaving the U.S. high and dry and 2) for making the U.S. support Israel after the British had a hand in helping Israel establish its Statehood in the Middle East after WWII.
I think jkh explained credit creation dynamics very well and debunked self serving savings glut myth. Unfettered structured finance by Wall Street is the initiator and China is only a willing but passive beneficiary of this process.
“…China received $1.67bn of aid in 2004… making it the seventh largest recipient, although that will decline as aid from Tokyo ends. As it has become richer and its global interests more important, China has begun using aid as a tool of diplomacy [???], especially in resource-rich Africa…” http://www.ft.com/cms/s/0/d409ce32-46a2-11dc-a3be-0000779fd2ac.html
“…Nigerian security sources said China was becoming one of Nigeria’s main suppliers of military hardware… Nigeria accuses militants of funding themselves with stolen oil but many industry officials say military personnel are involved in cartels that sell stolen oil to criminal syndicates…” http://www.ft.com/cms/s/ef8dbc30-a7c6-11da-85bc-0000779e2340.html
“Without the ability to settle foreign exchange transactions in gold, the rest of the world had no choice but to continue to fund U.S. indebtedness with the proceeds earned from U.S. consumption.”
Nobody has a shot gun to their heads forcing them to sell to the U.S. consumer. If they think there is a risk holding U.S. dollars, they should seek barter arrangements or not sell.
“…Back then, bulls would tell you the Tokyo market could only go up because Japanese savers had nowhere else to put their cash. Today we are told that because Chinese investors can only get 3.5 per cent on bank deposits, while inflation is running at 6.5 per cent, they have no alternative but to buy stocks. This fallacy is seductive… It is generally deployed as a last resort, when the fundamentals have fallen by the wayside. And whenever I meet it, the phrase “Japanese wall of money” springs to mind… They are plainly very different - indeed, the Chinese economy resembles nothing the world has ever seen. The parallels are rather in human behaviour, which in times like these sets market prices as much as the fundamentals… The snag is that we have no good data on Chinese real estate prices, nor would most people believe them if we had. As for the banks, it would be surprising if an essentially state-controlled system had mastered the techniques of commercial lending… As Charles Dumas of Lombard Street Research remarks, China is in a solipsistic bubble…” http://www.ft.com/cms/s/0/5d78a18a-6191-11dc-bf25-0000779fd2ac.html
“…At June 2007 UK banks’ cash deposits at the Bank of England were £2.4bn, while the notes and coin held in their tills were worth just under £8.8bn and their holdings of Treasury bills were under £8bn. By contrast, their total sterling liabilities were over £3,150bn. Cash is about ½% and traditional liquidity about 1% of total liabilities. The reduction in the ratios of these low-earning assets to total assets has of course been good for bank profits, but the contrast with the conservatism of the past is striking… The Bank of England is nowadays more an economic research department and less a banking business than it was 50 or 100 years ago. Unless its commercial bank customers maintain a larger buffer of genuinely liquid assets than in recent years and unless the constraints imposed by its limited capital base are overcome, the Bank cannot be expected to “bail out” the UK’s money markets in the traditional fashion.” http://www.ft.com/cms/s/0/04ead7fc-5f36-11dc-837c-0000779fd2ac.html
A few weeks ago the dollar strenghtened against the euro during the financial turmoil, and now it is weakening expecting a rate cut. It is interesting to see how the yuan moved against the USD during this time. When the dollar strenghtened, the yuan weakened against it (breaking the slow appreciation trend), and now it is appreciating against it. It seems to me, that the main concern of the Chinese policy-makers right now is the EUR/CNY rate. They did not let the yuan appreciate too much against the euro a few weeks ago, and now, that the dollar is falling, they can continue the slow appreciation against the dollar.
I have a problem with the so called ’savings glut’. Roughly half of what the PBoC uses to purchase foreign debt with is freshly created Yuan (’unsterilized’). Ditto for most other central banks. This may be ‘liquidity’, but how can it be termed savings?
algernon,
You’re exactly right. When Bernanke mentions savings glut, I think what he means is credit glut. All the world’s major central banks (US, China, Japan, Europe) have been flooding the world with credit. US and Europe have been doing it mainly to fund deficits. China and Japan have been doing to prop up export strength. Europe has been doing it the least, so the Euro is the strongest relative currency. The US runs the largest deficit, so it has been the biggest borrower.
This is causing rapid inflation worldwide. Not in everything. Mainly real estate, equities, commodities and health care for now. Eventually, I suspect it will spread to everything.
The problem is this can’t be stopped. The world can’t go from mega borrowing to mega paying back without causing a big worldwide recession or an even worse depression. So the game goes on with everyone playing their part.
“…DBRS said that, in future, it will no longer give its highest rating - R-1 (high) - to paper with Canadian-style liquidity provisions. That decision came after Bank of Canada Governor David Dodge said Wednesday that central bank officials had spoken to DBRS about the unique Canadian rule… “The issue was the nature of the rating of the Canadian paper, without full liquidity backstop,” Mr. Dodge told reporters in London. “And what we were aware of was the fact that this paper was being rated by one agency; this was creating a market that … might be larger and contain somewhat more risks than people were aware of.”…” http://www.globeinvestor.com/servlet/story/RTGAM.20070912.wdbrs0912/GIStory/
The British misleading the U.S. into the Iraq invasion with the WMD claim in the first place not to mention pulling out all their British troops leaving the U.S. high and dry. - Keypoints
The British “poodle dog” followed “little” Bush into the fiasco. But the Weapons of Mass Destruction disinformation was stovepiped into the Whitehouse by Pentagon Neo-conservatives led by Paul Wolfowitz and Douglass Feith. With their Neo-con supporters in the Project for a New American Century think tank, they actually believed that Iraq retained WMD as only a matter of faith, not any hard evidence supporting the claim. A majority of Americans still believes that Saddam retained WMD weapons fed by disinformation from Fox News, Wall Streeet Journal, etc.
This may be rather simple question, but when economists say “US current account deficit is financed by Asian economies,” do they look at gross, or net, capital inflows to the US?
Intuitition is to look at “net,” but it may (since inflow and outflow offsets) be misleading. This makes a difference, when looking at official or private capital flows. Indeed, the IMF often seems to be looking at “gross.”
Looking at the actual balance of payment data of the US, in terms of NET capital inflow, the largest financer of US external imbalance seems to be official reserve accmulation. But in terms of gross, it is private investors.
From this number, is it private sector or investment bank that is the major financer of the US current account deficit…?
With his personal contacts in the Federal Reserve, John Berry at Bloomberg has been very accurate with his predictions in the past. Quarter point rate cut definitely. What Wall Street wants is “dirt cheap” money to fuel the Ponzi debt structure of the U.S. economy, Ben Bernanke will bend over and deliver with his fleet of transport helicopters.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_berry&sid=azuhIK8QrQrI
A quarter-point looks more likely. Presumably, any cut in the lending rate target would be matched by a reduction in the 5.75 percent discount rate, the interest rate Fed banks charge on cash loaned directly to financial institutions.
algeron –
the dollars China earns selling exports but doesn’t spend on imports is certainly savings (ditto for the oil exporters). and on the domestic side, a large part of the increase in reserves is sterilized — meaning the PBoC borrows domestic savings put in the banking system to, in effect, buy US and European assets.
There is no question that China “saves” more than it spends domestically, and that a large fraction of that savings is borrowed by the PboC and CIC and invested abroad. if china was just running the printing presses (issuing cash), the result would be an even bigger increase in domestic inflation, a rise in domestic spending, a real appreciation and an increase in imports and eventually no external surplus.
jkh — thanks for pointing out the dodge remarks. they are clear and concise. in some sense tho they are derivative of Bernanke’s earlier talk on the savings glut tho?
“The top 20 earners among private equity and hedge fund managers are earning average yearly compensation of $657,500,000, with four actually earning more than $1 billion annually. The otherwise excessive $36,400,000 average annual pay of the 20 top earners among CEOs of publicly-held companies looks paltry by comparison.” - Paul Craig Roberts
In the last gilded age of the 1920’s, at least we had American industrialists that built railways, steel mills, oil refineries, automobile factories, mines, etc. The Rockefellers actually built real stuff. Now we have Wall Street hacks led by Robert Rubin and Hank Paulson from Goldman Sachs that have never produced a damn thing in their entire lives, bankrolling their billion dollar fortunes through unregulated paper manipulation, and controlling the democratic and republican parties, respectively with their political campaign contributions. Paulson earned his personal fortune selling the AAA rated, toxic waste CDOs to pension funds across America. Citicorp’s Robert Rubin earned millions from his personal involvement with the criminal enterprise otherwise known as the Enron corporation. I am so sick of this BS of financial fraud and corruption.
Prof Setser;
DC’s first post begs an interesting counterfactual: in the absence of large W’s US deficits, what would have happened?
The budget would not have provided so much fiscal economic stimulus through the early 2000s. But the Chinese don’t make up a large portion of Federal purchasing, so reduced federal expenditures wouldn’t directly reduce imports from China. China would still have had lots of dollars to stockpile - but the US wouldn’t be looking to finance an additional $2 Trn of debt. It seems to me that without competition from the FG for dollars, interest rates would have gone lower!
Would the low-rate housing boom have hit harder and faster? Possibly. Would US (and other Asian) manufacturing have been hurt? Certainly - the Chinese would not have altered the RMB peg. What else - more dollar-based carry trade, more sub-primes, more hedge-fund risks as returns get squeezed farther…
DC — I share your concerns about a new Gilded Age. I suspect former Secretary Rubin does as well.
I do wish though that you would not slander Rubin for things that are not true (i.e. Enron). I rather suspect that Pauslon wasn’t personally peddling CDOs either, he was too high up in the firm to do that — though Goldman certainly was pushing CDOs during his tenure. I would also guess that Paulson isn’t particularly worried by the new gilded age either.
You paint with such a broad brush that you miss some important distinctions.
jkh,
When US banks extend credit to consumers, they don’t do it on the basis of expecting to source the funds they need from China.
Yes they do, because they take interest rates into account. If Chinese demand for dollar assets is keeping rates low, then the banks are responding to that. As long as China is running a CA surplus, those dollars have to come back into the US at some point.
A better question to ask is why were only homeowners and hedgefunds seeking a big chunk of this pile of liquidity? Factories, automation, infrastructure, alternative energy - cheap money lets you do a LOT. What was the rest of the economy doing - was there no other good investment to be had?
There must be a “glut” coz even when we gave them a negative real return, they were still buy our crappy paper.
Brad this is going to sound dumb seeing that this is something basic. But can you bring me up to speed on how a foreign CB goes about purchasing bills, notes or bonds, when they might buy them (re: surplus or sterilisation or intervention) and from whom? The assumnption it seems that Bernanke is making is that foreigners and their CBs are setting the prices for Treasuries a along/somewhere on the yield curve. Is that right?
i tried to launch the word ‘blending’ to express the simple fact that every ‘borrower’ does a deal with a ‘lender’, presumably and ideally a deal that satisfies them both - at the time it is made.
the expression ’savings glut’ makes me uneasy for similar reasons. o.k. there’s a savings glut, but there must be an equal and opposite spending binge somewhere else.
also the recurring idea that the chinese will one day take a hit on their dollar holdings. suppose that they take a 30 per cent hit, but the things they ultimately want - oil perhaps, or commodities, or to buy american or european high tech companies - had gone down by half ?
there is a lot of ‘glass half full - glass half empty’ debate about these things. it is the same thing expressed differently.
just as bulked and sliced dodgy mortgage debts are . . . ’securities.’
bernanke is neither right nor wrong. the question is - is the language of ’savings glut’ a useful way to talk ? does it manifest a truth - or hide one ?
looking around me in 2007 i see an easy mortgage glut, a derivatives glut, a glut of dealers and creative accountants, a leverage frenzy, a credit card binge, a military spending glut, a cheap asian labour glut, a money laundering glut, a hypocrisy glut, and a glut of media spun eyewash.
not many shortages around ? oil, honesty, leadership - seem to be in short supply.
food, topsoil, groundwater, democracy, and peace - some threat to those.
maybe my understanding is too simplistic ? how can the chinese savers be so wrong, if warren buffett is so right ? maybe we are witnessing the great bear raid on america ?
bsetser - re Dodge speech:
Yes - Dodge is quite consistent with Bernanke - although somewhat clearer in my view with respect to the overarching premise of an imbalance of desired global savings versus desired global investment. I find that Bernanke tends to dive headlong into the deep end of sub-global imbalances (i.e. current accounts), without justifying or even clarifying the global premise. The thought train seems muddied to me, always working feverishly with the sub-global pieces, just beneath the surface of the grand global assumption. Dodge states the global premise, but just presumes it, at least for this speech.
Either way, I still search for a satisfying generic explanation of the evidence for global imbalance, as well as acknowledgment of a distinction between global imbalance (global savings and investment) and sub-global imbalance (current accounts).
Moreover, I seem to recall a recent Roubini paper where he actually questioned the presumption of global imbalance due to savings glut, based on the lack of corroborating evidence in terms of trend share of global GDP.
So one of my beefs with the glut thesis is that I just don’t think the argument is cogent enough; and there’s too much circular reasoning in it - just my layman’s impression. And then I find that my personal instinct for economic and financial logic (quite unburdened by rigorous schooling, although not proudly so) steers me in quite a different direction than the glut thesis.
I did think the Dodge speech was quite good in terms of his riff in extending the analysis of current credit problems to the importance of transparency in a more universal sense - including SWFs - a topic on which you’ve blogged in the broader policy sense.
Gillies -
” the expression ’savings glut’ makes me uneasy for similar reasons. o.k. there’s a savings glut, but there must be an equal and opposite spending binge somewhere else. ”
I believe I feel your pain.
Too simple? Maybe. Maybe not.
But economic theory in this area features some of the most cumbersome and inelegant geometry one could ever not wish for. Something that mathematically awkward and not nice is quite worthy of questioning.
P.S.
Some day, a long time from now, the algebraicists will grab a hold of economic theory and do it right.
I appreciate your comment, Cassandra.
If you look at NET inflow, of course central banks appear to be playing a large role. However I think one should look at gross capital inflow to see who is actually financing it. Central banks are purchasing lot of US assets but the Fed hardly increase foreign reserve, so on NET, Asian central bank’s contribution seems to be large. But looking at gross, 70-80% of inflow still comes from private sector…
I just took a look at this interesting thread, having been sidelined for several days. I’m struck by the way all participants seem to use “savings” and “investment” as if the national income identities corresponded to normal, everyday, purposive meanings. They don’t.
Without getting into a big deal about it here, I can point out that I published an article in the latest issue of Challenge on this topic. It criticizes the logic and evidence on which “savings glut” and related arguments are made. I have heard no response from any economist, which means either that no economists read Challenge, or that my article is beneath comment. For now, I guess I will have to remain agnostic.
My recollection is that under Reagan, the withholding tax on U.S. treasuries was eliminated. So emerging market demand for U.S. government securities went up. Reason: tax evasion.
Unbenounced to your country of residence, open an account in a tax haven with no income tax. Buy U.S. treasuries, receive the income in the tax free jurisdiction, do not report as income in your country of residence, do not pay U.S. withholding taxes.
What a cool way for the U.S. to finance its overseas spending which drives the current account deficit by the way.
I believe the savings glut hypothesis is false. The U.S. has no foreign currency constraint. The problem for the world is that, when it disagrees with U.S. spending priorities, it still holds dollars, thereby financing the spending it disagrees with.
As has been pointed out here the U.S. (over) spending is funded by credit creation, and funding of government debt.