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.