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Global savings growth?

by Brad Setser
September 26, 2007

michael pettis

One of the comments on one of my earlier posts had me search out a quote from Steven Roach about there being no growth in global savings to support the global-savings-glut thesis.  There were also several interesting comments on the topic following the initial comment.  But rather than keep the discussion buried in the comments section, I thought I might pull out the Roach piece and discuss my reaction a little more fully.   

I have no doubt that this subject will elicit a flurry of comments – some brilliant and some cantankerous – but even though many of Brad’s readers may disagree, I do not think the savings-glut hypothesis has been fully demolished.  I, for one, still find it very illuminating (and no, I am not trying to shift the blame to the damned foreigners – as I said in another post, I don’t think there is any blame to apportion out).

There is no glut of global saving. Yes, global saving has risen steadily over the past several decades, but contrary to widespread belief, the rise in recent years has been no faster than the expansion of world GDP. In fact, the overall global saving rate stood at 22.8% of world GDP in 2006 – basically unchanged from the 23.0% reading in 1990. At the same time, there has been an important shift in the mix of global saving – away from the rich countries of the developed world toward the poor countries of the developing world. This development, rather than overall trends in global saving, is likely to remain a critical issue for the world economy and financial markets in the years ahead. 

So says Steven Roach, Morgan Stanley’s Chief Economist, in a very interesting piece last year about the shift in global savings that has taken place over the past ten years.  Basically Roach points out that the advanced countries of the world, which accounted for 80% of global GDP in 1996, have seen their share of global savings drop from 78% in 1996 to 65% in 2006.  Part of this decline can be explained by their declining share of world GDP – the US share has remained fairly constant, but the rise of China and India has been accompanied by the relative decline of Europe and Japan.   

I am not sure, however, that the global savings glut thesis requires a rise in total global savings.  Bernanke's argument, as I interpret it, is that there is an excess of savings in certain parts of the world – specifically in East Asia and the oil-exporting countries.  This explains the US current account deficit because as these excess savings pour into the US economy – the only market deep and secure enough to absorb them – they automatically cause a counteracting adjustment in the US balance of payments. 

Against this Roach, and others, have argued that since global savings have been constant as part of world GDP over the past decade (around 23%), where can we find these excess savings?  To describe a system, in which savings has remained constant as a share of GDP, as experiencing a savings glut seems, at first, to make little sense. 

But not necessarily.  Leaving aside the possibility that there can easily be a savings glut even in a system that sees a decline in savings, if investment demand is declining more quickly, I think there is another explanation that fits current conditions well.  If Bernanke is right, one part of the global system creates through the balance of payments mechanism an excess consumption in another part of the system.  If every part of the global system were completely rigid, a rise in savings in one part would result in a global rise in savings.  But if at least one part of the system has a highly open and flexible financial system, it will act as the residual whose changes force the overall system back into balance.  In the aggregate total savings and consumption may seem to have changed little, but what has happened is that an imbalance in one part has forced an equivalent but opposite imbalance in the other.   

Not only does this seem to me an automatic outcome of excess savings, but it also seems to describe reality quite well.  The US financial system is global in scope and so astonishingly flexible that it shifts very easily to accommodate global changes.  If the rest of the world must produce more than it consumes (which is to say it saves more than it invests), the balancing entity must consume more than it produces as it absorbs those excess savings. 

Roach finishes his piece by saying: 

From the start, the concept of the global saving glut was very much a US-centric vision (see the March 10, 2005, speech of then Federal Reserve Board Governor Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit”). From America’s myopic point of view, it believes it is doing the world a huge favor by consuming a slice of under-utilized saving generated largely by poor developing economies. But this is a very different phenomenon than a glut of worldwide saving that is sloshing around for the asking. The story, instead, is that of a shifting mix in the composition of global saving – and the tradeoffs associated with the alternative uses of such funds. I suspect those tradeoffs are now in the process of changing – an outcome that is likely to put downward pressure on the US dollar and upward pressure on long-term US real interest rates. If the borrower turns protectionist – one of the stranger potential twists of modern economic history – those pressures could well intensify. Don’t count on the saving glut that never was to forestall these outcomes.. 

I am not sure I agree with this except to agree that to call it a savings glut is US-centric, although I am not sure I would have expected anything else coming from the head of the US central bank in a speech on the US trade balance.  But to say that we are seeing a “shift” in savings rather than a glut of savings doesn’t add much to this particular picture.  Excess savings can very easily resemble a global “shift” in savings through changes in the international balance of payments.  It is not obvious to me that these two things are necessarily different. 

15 Comments

  • Posted by Peter

    “This explains the US current account deficit because as these excess savings pour into the US economy – the only market deep and secure enough to absorb them – they automatically cause a counteracting adjustment in the US balance of payments.”

    This is exactly backward, IMO. (1) The excess savings are coming largely from sovereign entities. (2) How did these entities acquire such a large stash of dollars? (3) What is this automatic process? If it occurs through the medium of an overvalued dollar, it is hardly automatic — indeed it would typically result in the violation of accounting identities which, by definition, cannot be violated. (The J-curve alone is sufficient to demonstrate this.) But if not in this way, what is the automatic process by which the items on the current account are adjusted?

    The opposite story, on the other hand, is readily told: capital account inflows, set in motion by current account imbalances, automatically adjust the domestic savings and investment totals.

    Peter

  • Posted by RebelEconomist

    I don’t think you can leave aside the possibility that there is an investment shortfall, Michael. As I often say, China’s saving inflow should have been a golden opportunity for the US to prepare for an ageing future by either investing more overseas in the form of their own reserves or by building domestic public infrastructure, but they have failed to take advantage of it.

    The problem is, contrary to Twofish’s optimism about the US political system, that it suits the politicians to let the people think that they can consume today because they have a bright future. Also, I emphasise the role of public infrastructure – bridges that dont fall down, levees around New Orleans, public transport, education and health services – which is exactly the sort of thing that gets left out of Twofish’s money-inevitable-but-OK politics. The problems with the idea that the politicians have to serve the people enough to stay in power is that:
    (a) the gains from sacrifice are years ahead
    (b) as far as the politicians are concerned, image (or “spin” as we say here) is as good as substance.

    China, Japan and some of Europe have probably done what is sensible given their demographic outlook. The US (and, to a large extent my own country, the UK) are the careless ones. Given the inability of the still rapidly growing countries like India, Iran etc to absorb savings from the ageing countries, there probably should be an investment and savings boom now.

  • Posted by jkh

    Ben Bernanke’s concept of the global savings glut is premised on the existence of international financial imbalances. For individual nations, these imbalances reflect several equivalent interpretations: the difference between current account inflows and outflows, the difference between capital account outflows and inflows, and the difference between domestic saving and domestic investment. These all amount to the same thing.

    A current or capital account transaction for one nation results in an equal and opposite transaction for another nation. It follows that the sum of all national imbalances is 0 for current accounts, capital accounts, and differences between domestic investment and saving. This means in turn that global investment and global saving are equivalent, ex post.

    If there such a thing as a global savings glut, it can only be ascribed to an alleged imbalance between planned saving and planned investment, ex ante. This is a difficult circumstance to identify and prove, but it is a necessary pre-condition for a global saving glut. As Michael P. points out, such an imbalance may not necessarily produce an increase in global savings – but it requires some evidence of a complying mismatch between the 1st derivatives of savings and investment, ex ante. This is perhaps a more difficult thing to demonstrate, if the global environment happens to feature stable or declining saving. Nonetheless, there is little hint of this logic or evidence in Bernanke’s speeches.

    Bernanke’s construct for the global saving glut, stunningly, doesn’t even refer to the equivalence of global saving and investment, ex post. Nor does it refer to potential global imbalance, ex ante. His argument is not based on global analysis; it is based on the pattern of national imbalances one level down. He essentially claims that the existence of outsized national imbalances implies the existence of a global imbalance. Specifically, the development of large surpluses is supposed to prove the existence of a global savings glut. And most other discussions of the global savings glut begin with the explanation of large current account surpluses, rather than the more relevant relationship between global measures of global saving and global investment.

    This is bit like contending that 0 + 0 = 0, but 10 + (10) = 1.

    The argument proceeds through the well-known history of large current account surpluses for one group of nations. This pattern of surplus nations is supposed to be proof of a global glut. There is no acknowledged economic causality attributed to the deficits of the rest of the world.

    The incontrovertible tipping point proof of the global surplus is supposed to be the phenomenon of low real interest rates in recent years. Of course, there is no acknowledgment that other factors may be at work in determining real interest rates, such as the much lower risk surrounding inflation expectations. While an assumed global surplus may lead to lower rates, there is no necessary inverse relationship that lower rates require a global surplus. A global surplus may be a sufficient condition for lower real rates, but it is not a necessary condition. Lower real rates are a necessary condition for the proof of a global surplus, but not sufficient to do so. The idea that low rates are plain evidence of a surplus is inadequate.

    Stephen Roach and Nouriel Roubini have each alleged error in the global fable.

    First (as reported earlier by blogger Emmanuel and by Michael Pettis above), Stephen Roach says:

    ” There is no glut of global saving. Yes, global saving has risen steadily over the past several decades, but contrary to widespread belief, the rise in recent years has been no faster than the expansion of world GDP. In fact, the overall global saving rate stood at 22.8% of world GDP in 2006 – basically unchanged from the 23.0% reading in 1990 …

    From the start, the concept of the global saving glut was very much a US-centric vision (see the March 10, 2005, speech of then Federal Reserve Board Governor Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit”). From America’s myopic point of view, it believes it is doing the world a huge favour by consuming a slice of under-utilized saving generated largely by poor developing economies. But this is a very different phenomenon than a glut of worldwide saving that is sloshing around for the asking ….”

    The above was sourced from Michael P. above as well as:

    http://ipezone.blogspot.com/2007/06/roach-there-is-no-savings-glut.html

    And Nouriel Roubini says:

    ” Ben Bernanke’s … March 2005 speech on the global current account imbalances being due to a “global savings glut” rather than, in large part in 2000-2004, due to the U.S. fiscal deficit is the intellectual baseline for this “US Capital Account Surplus” interpretation of the US international financial position. The thesis is clear: we do not run a current account deficit; we run a capital account surplus because the rest of the world wants to invest in the high productivity high growth U.S. Of course, the appropriate economic causality is here reversed. The logical causality is that, if we save less than we invest and if we spend more than we have income, we will run a current account deficit and we will have to borrow from the rest of the world to finance it. But our borrowing – now mostly in the form of debt as net FDI and equity inflows have been sharply negative for the last few years – turns in the Orwellian language of the ERP into a “capital account surplus”. Of course, as the BOP is by definition in balance, a current account deficit needs to be financed with a capital inflow that is defined as a capital account surplus. But having the Chutzpah to title this deficit as a capital account surplus and then go on for the entire chapter to interpret all of the global current account imbalances as a matter of capital exporting countries (i.e. countries who run current account surpluses) and capital importing countries (i.e. the few countries who run current account deficits) is to confuse cause and effect…Contrast this “un-named Bernanke” interpretation of the US current account deficit as a capital account surplus with the serious concerns recently expressed by the New York Fed President Tim Geithner about the unsustainability of the US current account deficit. So, if you want straight talk rather than doublespeak about the US current account deficit, read Geithner. Bernanke has promised to use plain English rather than the Delphic oracle language of Greenspan; but if the ERP is an indication, we may be in for plain English doubletalk about the current account, the budget deficit, the relation between asset prices and monetary policy, the lack of savings, the housing bubble and a few other unpleasant facts and vulnerabilities in the U.S. economy.”

    The above is from: http://www.rgemonitor.com/blog/roubini/117412/

    My own view is that Bernanke has politicized the issue of the ‘global savings glut’ by characterizing a sub-global phenomenon (non-US excess savings) as ‘global’. If there is a glut, it’s obviously not global, because the US doesn’t share in its directional substance. It fails to do so in a most spectacular way. Even if construed as an important catalyst for the savings glut, the US is not part of it. This is a piece of linguistic gymnastics – even “Orwellian” – that twists the inference of the word ‘global’. The US, while a participant in the global dynamic, is obviously is not one of the savers contributing to the alleged global scope of the global glut. The politics of this characterization obscures the excess consumption in one area that is required to achieve surplus saving elsewhere. To acknowledge this would be to admit more openly and directly that excess consumption in the US is required as a critical factor in facilitating the bulk of global current account surpluses.

    The analysis of global flows is fertile ground for different interpretations of causality. It is often portrayed that excess ‘global’ savings lead to US current account deficits. Yet net capital flows require net current account flows as much as the opposite – maybe more so. The more accurate causality likely is that the export of dollars through the US current account deficit is required to create the flow back of dollars through the capital account. China can’t be a net supplier of US dollars without generating the dollars from its current account surplus. How would it begin to generate substantial net capital outflows in US dollars, sui generis, without this?

    China is a lynchpin enabler and facilitator of this process, by injecting economic steroids into its export sector. China chooses to export. And the Chinese consumer, a phenomenal saver, chooses to save. The Chinese consumer does not need to deliberately avoid buying goods that are not available to him/her – exports are not offered first to the domestic Chinese consumer as a ‘right of first refusal’. This is a strategy of generating foreign consumer demand in order to generate additional savings in China via a current account surplus. But China as enabler does not account for the decision of the US consumer, when it comes to spending into the US current account deficit, which is the source of the dollars. So the US consumer is if anything an equal if not more autonomous enabler of the resulting imbalance.

    Michael P. notes importantly the special role of the US financial system in facilitating the imbalance dynamics:

    ” By the way, the reason a country should save is so that its investment needs are met. The US is an exception. Its financial system is able to draw on global savings for all its domestic investment needs. I am not sure “excess” consumption is as much a problem for Americans as it would be for other countries. ”

    The above is from: http://piaohaoreport.sampasite.com/blog/China-and-the-savings-glut-2.htm

    So the flexible US financial system plays an important role in absorbing non-US surpluses. And this financial system has enabled financing for US excess consumption just as much as it has filled in the savings gap for US domestic investment. After all, the parking of several billion in US government debt overseas has little direct connection to the financing of US domestic investment. Dollars that escape through the current account deficit flow back to the US as capital of some sort. The efficiency of the domestic US financial system ensures that what has essentially already been allocated to expenditure through the current account or invested domestically is in fact fully financed. The overseas flow back is merely grease for the domestic source-financing wheel. The dollars that flow back are used mostly to buy government debt, and the dollars received for those bonds move out into the broader domestic economy. This process is as likely to complete the cycle of domestic financing for current account expenditure as it is financing for expenditures on domestic investment.

    The equivalence of net capital inflows with an excess of domestic investment over domestic saving is only that – equivalence of financial magnitudes – not a statement of direct connection or causality. The same holds for the equivalence of current account deficits and capital account surpluses. Just as the ultimate blame or causality of the savings glut is a futile argument (and declaring a global saving glut attributable to asymmetric surpluses is not much different than assigning ‘blame’) – so is the connection of capital inflows to either domestic investment spending or current account expenditures – at least in a financial system as sophisticated and complex as the US one. The densely circuitous and flexible nature of the US domestic financial system allows both elements to be financed, supported by what is essentially automatic capital account flow back from current account deficits. The asset allocation and pricing of the flow back is uncertain, but the adequacy of the flow back is unquestioned as a result of the predominance of US dollar invoicing, and an international banking system that unfailingly returns US dollars into the sphere of domestic monetary policy and domestic bank deposit accounts – the dollars that foreign central banks use to buy assets are essentially pulled from foreign bank nostro accounts that already have their money back in the domestic USA.

    In summary, the savings glut, if it exists, is symbiotically generated and enabled across a global scope, but is itself local or sub-global rather than global in substance. Accordingly, if it exists, it is only one part of a larger and more complete and accurate story of global imbalances. Ben Bernanke’s patented global characterization of such a savings glut is a distortion, and not helpful in this regard. I wish he’d get rid of it.

  • Posted by Emmanuel

    jkh–thank you for the very detailed commentary stating the case against the “global savings glut” hypothesis.

    Michael Pettis–sorry if I came across as “cantankerous”! I was just a bit overcome by cognitive dissonance as I usually visit RGE to get my daily fix of bearish views on global economic imbalances, so I was startled to see a contrary (contrarian?) view.

    Anyway, like jkh said. You’ll not be surprised that I too am skeptical of the “American markets are so open that they’re practically made to absorb the rest of the world’s surpluses” argument. In other words, “deficits don’t matter because there’s a global savings glut ‘forcing’ Americans to run deficits.” This stuff is not new. Brad DeLong calls it single-equation economics and I am not one to argue in this respect.

    The Wall Street “don’t worry be happy” view is very much an enjoy the status quo thing: there is no such thing as American profligacy, it’s just a natural response to the rest of the world saving more, Americans are actually quite thrifty once you consider capital gains as savings, etc. It’s a neat story to get consumers out there to spend more and more regardless of the consequences, but at the end of the day, it’s the summation of the decisions of individual American consumers to wage jihad on fiscal sanity driving these imbalances, not capital market openness. Get the actors right and the rest will follow.

    And don’t even get me started on what Americans have been “investing” in these past few years–rapidly depreciating housing. But that’s another story for another day [cue God Bless America's Deficits...]

  • Posted by Guest

    Renegade Economics: The Bretton Woods II Fiction
    Do today’s lopsided financial imbalances in the global economy pose a grave threat to long-term prosperity and political stability?

    Where Is Neutrality for the Fed and the ECB?
    The Fed sets interest rates based on the outlook for US growth and inflation. But with many countries in Asia and the Middle East (more or less rigidly) pegging their currencies to the dollar, the Fed implicitly also influences the monetary policy stance in these countries. The correct monetary policy stance for the US economy may thus not be the right stance for the wider dollar bloc. Arguably, with many countries in the dollar bloc, such as China and other emerging markets, growing more strongly than the US, a fed funds rate of 4%, while neutral for the US, would imply a very expansionary monetary policy there. This could (over-) stimulate growth and raise inflation pressures in these countries, unless they accept an appreciation against the dollar or use capital controls to drive a wedge between US and domestic interest rates.

  • Posted by EthanJ

    RebelEconomist, I’m with you this time (mostly).

    While I think there’s some truth to the savings glut hypothesis, the fact remains that the historically low interest rates of the 2000′s offered a tremendous opportunity to invest in America for the future – urban light rail, intercity high-speed rail, alt. energy and grid upgrades, education, faster internets and municipal wi-fi, etc.

    In that context, housing wasn’t a bad choice. After spending the ’90s getting rid of lots of warehouse-style public housing projects, a glut of condos, apartments, and mid-range homes seems a good thing for housing in this country. Especially considering the progressive devious taxation method: across-the-board reductions in house prices for all homeowners, to subsidize low-income renters and future first-time home buyers. Not too shabby…

    But what else did we spend the money on, aside from tax breaks for the super-rich to pad their hedge funds? War. Lots of non-investment military and security goods, lots of things that are designed to explode, and massive future health care obligations for injured veterans. If we’d just taken 2 trillion dollars out to Burning Man and set it on fire, we’d still be ahead.

    Had we instead invested that money in America, perhaps we could have reversed the trade imbalances faster, with new high tech industries in transit and energy to fuel growing exports and green growth tools for emerging economies.

    Regardless of the glut, opportunity wasted.

  • Posted by EthanJ

    jkh:
    Bernanke’s construct for the global saving glut, stunningly, doesn’t even refer to the equivalence of global saving and investment, ex post. Nor does it refer to potential global imbalance, ex ante. His argument is not based on global analysis; it is based on the pattern of national imbalances one level down.

    This is inaccurate, I think. By definition, savings and investment are equal. But saying S = I does not tell you anything about interest rates and relative demand.

    BB’s point is not that S > I, but rather that there has been a substantially greater demand for S than I. Savers are bidding down the price savings, with the effect that interest rates have been pushed down. And BB is arguing that the fall in interest rates was driven more by a surge in the desire to save than a fall in the desire to invest.

    IIRC, the “savings glut hypothesis” first emerged as an answer to the earlier theory of an “investment dearth”, which was offered to explain the record low rates of 2000-2003. That earlier theory argued that a decline investment as a result of the dot-com bust and recession was to blame for declining interest rates. In popular parlance, massive overspending on computers, networks, and capacity during the bubble (and Y2K) had left the country awash in excess capital and there was little good investment left. As a result, corporations and investors were forced to chase after lower returns and mediocre opportunities. But in fact, as we now know, the bigger pressure was from the surge in savings coming from overseas. It’s not that investments dried up – rather, there was too much savings chasing after them.

  • Posted by jkh

    Thanks, EthanJ.

    I’m not sure why the ‘surge in savings from overseas’ is a particularly special factor in the case of a savings glut, when the size of the surge (if its savings) is constrained by the size of offsetting current account deficits, and the deficits alone are sufficient to absorb the surpluses. Why emphasize the surpluses over the deficits? The answer usually has to do with interest rates. Interest rates are supposed to be evidence, but they could have declined for other reasons – in particular, the risk premium for inflation, which is an embedded component of the real rate. It’s easy to make the case that real rates have been cut at least in half from levels a decade ago because of the stability of inflation.

    I was aware of the dearth – glut debate but I’m not sure how you prove either, or indeed one over the other. To me, they’re just hypotheses for economic behavior, neither of which have been proven.

    But mostly I dislike the ‘global’ moniker for the glut, even if there is one. If there is one, it’s more regional than global, with the rest of the world engaging in a consumption glut of equal and opposite proportions.

    I think the whole thing boils down to using low interest rates as the rationalization for a particular theory, be it dearth or glut. That’s too convenient for my mind.

  • Posted by David

    What role, if any, does an overly accommodative U.S. monetary policy play in this debate? By lowering the real rate into negative territory and discouraging domestic savings, has not the Fed over the past few years been an enabler of the saving glut?

    In other words, the Fed’s policy created a saving vacum in the United States that was filled by saving from Asia and oil-exporting countries. The saving glut, then, would be a passive response to the hegemonic monetary power’s overly accommodative policies.

    Of course it takes two to tango and the no one is forcing the Chinese to peg their currency to the dollar, but to the extent Chinese monetary policy is being determined in Washington D.C.–and making Chinese consumption more expensive by increasing the price of imports–then the Fed is instrumental in creating this saving glut.

  • Posted by jkh

    I agree that the Fed was instrumental in facilitating the US current account deficit, with the corresponding shortage in US savings, and the resulting surplus in savings outside the US. The Fed generated the low interest rates that are relevant to US consumers. Low rates led to excess US consumption and resulting non-US surpluses, as much as vice versa.

  • Posted by bsetser

    David — under normal conditions, wouldn’t lower interest rates make it harder to pull in funds from the rest of the world,not easier? I can see some links between low rates and higher savings elsewhere. low rates = $ weakness = rmb weakness = chinese policies to hold down investment/ push upsavings v.investment to try to contain domestic impact of rmb weakness. or lower = us rates stimulate us demand and thus help push up oil prices and increase savings in the oil exporters ..

    but that seems too thin an explanation of recent developments. long-rates didn’t fall when us short-rates rose — suggesting that low long rates weren’t simply a product of us policy, but also reflected global (including central bank) demand for us fixed income assets. and oil didn’t come down as us rates went up either …

    moreover, i think there is a plausible case –one made most forcefully by martin wolf — that central banks seeking to maintain full employment in a “glut” world, one marked by very high savings in china/ the oil exporters, have to cut rates to stimulate demand. that reverses the causality — low us rates are a response to high savings elsewhere.

    the fact that savings are rising even faster than investmetn in china – and there is an $80 oil price related glut of cash in the middle east — has left me convinced that bernanke was more or less right. I though would put a lot more emphasis on the role of government policies in creating the savings glut that he does — and a lot more emphasis on central banks as a necessary vector bringing the world’s savings to the us even with low returns on us savings (low rates/ weak $)

  • Posted by Guest

    or as Chris Dialynas and Marshall Auerback put it “…BWII is not global in scope; nor does it retain any vestigial linkage to gold, nor any contractual obligations. It is less a monetary “system” and more monetary fiction, articulated to rationalize the dollar’s perverse resilience in the face of America’s increasingly parlous debt build-up and America’s seeming immunity to Third World style debt-trap dynamics. It artificially distorts risk premiums and encourages destabilizing financial practices such as the so-called “yen carry trade.” A misleading snapshot, it ignores the harmful impact of today’s exchange rate anomalies, rather than seeing them for what they are: the roots of a convoluted financial architecture, which have—and continue to create—great imbalances that ultimately threaten global stability and freedom…” http://www.pimco.com/LeftNav/Viewpoints/2007/Renegade+Economics+-+Executive+Summary.htm

  • Posted by Guest

    even more telling, central bankers themselves characterise BWII as an ‘unfortunate’ monetary arrangement rather than a ‘natural’ consequence of their populations’ savings behaviour. it appears having chosen BWII as a path to development, they’re finding they’ve been led astray and don’t know how to get off…

    BWII persists then, because there’s nothing better to replace it with ex post.

  • Posted by David

    Brad:

    I agree that U.S. monetary policy cannote explain all of the global imbalances. However, it seems reasonable to assign a non-trivial portion to the Fed.

    Regarding your first point, yes, lower real rates would not normally pull in foreign savings, but these foreign savings are not so much being pulled in as they are being pushed in by policy choices. This is the global liquidity glut theory of global imblances that you outline so nicely above (I also have some postings on it here and here.)

    Finally, given the world economy is still out of balance, the saving glut theory taken to its extreme implies the US economy should continue to live beyond its means in order to keep the world economy going. Do we really want that?

  • Posted by Guest

    Michael ,

    Gove me your savings and I will prove that there is no glut