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

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?

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

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 $)

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.

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.

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.

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.