Case closed: A savings glut, not an investment drought
The data at the back of the IMF’s latest WEO (table A16) indicate that the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment.
In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could invest more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”
The big drivers of this trend. “Developing Asia” and the “Middle East.” Developing Asia saved 45% of its GDP in 2007 — up from 33-34% in 2002 and an average of 33% from 1994 to 2001 (and 29% from 86 to 93). Investment is up too. Developing Asia invested 38% of its GDP in 2007, v an average of between 32-33% from 1994 to 2001. Investment just didn’t rise as much as savings. The Middle East also saved 45% of its GDP in 2007 – up from 28% of GDP back in 2002 and an average of 25% from 1994 to 2001 and an average of 17-18% from 1986 to 1993. Investment is up just a bit — at 25% of GDP in 2007 v an average of 22% from 1994 to 2001.
It is historically unusually for an oil importing region to be saving so much when the oil exporters are also saving so much. Usually a rise in the savings of the oil exporters is offset by a fall in the savings of the oil importers. The enormous rise in Chinese savings even as China’s oil import bill has soared (along with oil export revenues and oil exporters’ savings) implies a bigger fall in the savings of other oil importing economies.
Government policy has played a big role in the high savings rates in both regions – whether the undistributed profits of Chinese state firms (a policy choice) or large fiscal surpluses of the Gulf financed by the undistributed profits of the Gulf’s state oil companies. It isn’t an accident that the emerging world’s savings glut has coincided with a rise of state capitalism – and a surge in demand from states and state enterprises for “flying palaces.” I suspect the emerging world’s savings glut largely reflects a glut in government (and SOE) savings.
Dr. Delong has argued that this savings surplus will persist for a long time, keeping US and European rates low and keeping housing prices in both the US and Europe higher than otherwise would be the case. Krugman’s fear that home prices need to fall significantly to bring the price-to-rent ratio closer to its long-term average won’t be borne out.
Possibly.
However, I don’t think it entirely implausible that savings rates in both Asia and the Middle East might start to converge toward their long-term average. What goes up sometimes also comes down.
An end to the emerging world’s savings glut would not be such a bad thing either. It would mean than the young and poor were supporting global demand growth – not the old and rich. That makes more sense to me.
Update: some type-os were cleaned up after the initial post. PGL’s commentary on this post is also worth pondering, even if I am not fully convinced (see the comments).
Which case is closed?
Both Middle East and Eastern Asia benefited handsomely from US centric Ponzi Scheme. Their CA surpluses were due to unlimited credit creation by shadow banking system with implicit political support from US government. They DID NOT start the process but FED
started it with Japanese help. Investment banks levered 1 to 33 and derivatives without margins this process did not required real
savings from Asia. Inevitable recycling of USD assets only prolonged the process.
People in the developing world spend a far greater percentage of their income on food. They also tend to buy staple foods directly, whose prices are very directly correlated to commodity prices, rather than the type of foods people buy in the West, where processing and packaging and branding and marketing tend to determine the price and the cost of ingredients is but a fraction of the sticker price. If the commodities bubble doesn’t burst it will be interesting to see if the savings glut melts away like snow in warm spring weather.
It will also be interesting to see if at some point foreign central banks start pouring large sums into food price subsidies in response to unrest or riots, rather than simply continuing to increase their foreign reserves. The combination of the above two effects may perhaps someday see the US starving for capital as the world starves for food.
Fair enough on the emerging world situation as you’ve described it - a glut because not only does savings exceed investment, but investment is higher than average as well. How does this correspond to Bernanke’s use of the term ‘global savings glut’, which relates excess emerging world saving to US rather than emerging world investment? It seems various economists use the terminology but change the definition and criteria to suit their own purposes. Is the emerging world glut you describe the same as Bernanke’s global savings glut?
Guest — yes, the emerging world’s savings glut is the same as Bernanke’s global savings glut. I was trying to be more precise — as the rise in savings is in the emerging world. On a global basis, savings and investment have to balance. In aggregate the emerging world’s rise in savings seems to have financed a fall in us savings (e.g. a rise in consumption) more than a surge in investment in the us. As a result, there may not be a "glut" of savings globally — even if there is one in the emerging world.
Sure there is a savings glut in emerging economies. But US has a saving scarcity. Glut is excess than normal but negative savings cannot be considered as normal. It is abnormal on the other extreme.
What should be the normal level of saving in a developed nation considering normal conditions like stable demography etc
I continue to be surprised by the way "savings" and "investment" are deployed in discussions about global flows. The pattern of these variables expresses an accounting identity and says nothing about causation. It is unavoidable that, given global imbalances on the current account, we would see something like the WEO table. The role of different countries, of course, can vary, and it is interesting that CB’s in so many developing countries are accumulating reserves at such a rapid pace and thereby forcing their citizens to "save".
What’s wrong with the "savings glut" rhetoric is that it implies, a la DeLong, that different savings/consumption preferences of households are ultimately causal. No doubt this is one factor, but there are many others, collectively more significant. One of the themes of this blog has been the crucial role played by sovereign entities. And there are others.
"the emerging world’s savings glut is the same as Bernanke’s global savings glut." Well not quite - as I argue over at EconoSpeak.
The global savings glut theory is interesting mostly because it has been the conceptual framework by which Alan Greenspan and Ben Bernanke have conveniently explained away the US current account deficit. This is interesting in turn because the Fed and the US regulatory system and government are now under attack on many fronts for their role in the US credit crisis. The global savings glut thesis fits conveniently with Greenspan’s continuing defence that his own monetary policy had virtually nothing to do with provoking the excesses. He blames the crisis in large part on the effect of the global savings glut on bond yields, over which he had no control, rather than his own influence on the Fed funds rate.
The global savings glut thesis and Greenspan’s use of it are as solid as mud. The emerging world savings glut described here (quite plausibly as the definition of a regional glut, without referring to interest rates at all) is defined as a function of the excess of regional saving over investment, reinforced by the fact that regional investment is already above trend. Interest rates are not noted here as part of the defining regional criteria. Stephen Roach has debunked this type of regional analysis when it is attempted at the global level on the basis that global saving, equal to global investment by accounting identity, has in fact not been above trend in recent years. Yet Greenspan and Bernanke argue that the US is a victim of a global savings glut that has caused low interest rates and credit market excess.
Which is it? Is the alleged glut a regional emerging world one, based on a regional current account deficit combined with above trend investment, as described here? Is it a global one that mirrors the above trend investment noted here at a global level? (not according to Stephen Roach) Is it a regional or global glut, however defined, that simply must be a glut because there are current account surpluses somewhere outside the US that simply must have caused low interest rates in the US? Which is it?
Roach is the only one that has examined the issue with intellectual honesty as it relates to the Greenspan/Bernanke hijacking of it, because he has looked at it globally, recognizing the fact that the accounting identities globally sum to 0, and he has examined the only other empirical evidence that might logically point to the idea of a global savings glut, that being whether or not global saving has been above trend. He concluded there has been no global savings glut at all.
Peter — I don’t think there is great evidence of a "household" savings glut in the emerging world — Chinese household savings hasn’t risen (relative to Chinese GDP) to my knowledge and i doubt household savings has increased in the gulf either. the decision not to spend the oil revenue (and to accumulate external assets) was made by governments not households.
PGL — I never interpreted Bernanke’s thesis to be about the overall level of savings and investment around the globe. As well know, if one country or region is saving less than it invests (whether b/c of it isn’t saving a la the US or b/c of a rise in investment), it has to borrow funds from the rest of the world. Rather i interpreted Bernanke’s thesis as an explanation for the conundrum — i.e. an explanation for why the fall in household and government savings in the US hadn’t pushed up US interest rates. In a non-glut world, the fall in savings would lead to higher us rates — and in turn higher global rates. the higher global rates would induce less investment and more savings globally. think crowding out on a global scale.
That doesn’t seem tho like a good fit with the data. Interest rates are low globally not high. Investment in the emerging world is up not down. And so on. To me the key bits of the glut are:
a) the rise in savings (over investment in the emerging world)
b) a resulting flow to the advanced economies at very low interest rates, as in some sense the emerging world governments have to lower rates to the point where they induce someone in the advanced world to borrow more. low rates on external investment could induce less savings in the emerging world, but so far that clearly hasn’t happened (see chart above).
we saw the "low rates induce more borrowing effect" i think when the us fiscal deficit improved from 04 to 06; low rates (and rising real estate values) induced households in the us to borrow more (and save less) keeping the deficit up. now households cannot borrow (b/c many overborrowed … ) but the us government is not finding a lot of resistance to a wild swing in its fiscal position (tho tis probably a bit much to say that the fiscal stimulus was induced by the expectation that official financing would be there, i don’t think it is too much to suggest that us policy makers didn’t need to worry too much about pushing up rates through wild fiscal expansion) and — through the intermediation of the eurozone banks — an expansion of the deficits in eastern europe.
According to International Monetary Fund (IMF) statistics, the world’s total foreign exchange holdings increased from $1.4 trillion in 1997 to $6.4 trillion last year, an average annual increase of 16.4% - compared with a 7% annual increase in Gross World Product. I interpret this as a pretty good proxy for the world supply of money/credit having more than quadrupled while the amount of ‘things’ has only doubled.
What I’m getting at is that a lot of money has been lent that has never been saved but rather created by central banks. Dr. Setser, are you perfectly sure that you are talking about actual savings?
Global annual GDP in round numbers is about $ 50 trillion US
Global annual savings in round numbers is about $ 10 trillion US
Global annual CA surpluses=CA deficits in round numbers is about $ 1 trillion
Global annual FX accumulation correlates sort of with annual CA surpluses
Growth differences can be explained because bases are different
Completely agree with the comment that the savings glut - in China, at least - is predominantly govt and SOE (plus former SOE)-led. What’s really interesting, to my mind, is that maybe 60-80% of China Inc’s balance sheet isn’t owned by the listed companies but by unlisted ownership groups. The balance sheet cleaning up and asset injections into listed companies we’re seeing right now will probably take another 2-3 years to be completed. Then, assuming everyone keeps to the agreements that were struck between govt and ownership groups 4-5 years ago, final-form listed companies will be free to direct surplus cash into organic/inorganic growth, and those ownership groups will no longer be forced to sit on the sidelines: they can start investing, instead of accumulating dividends. The savongs glut will drop dramatically and I strongly suspect the stock market will rise in China, as will the prices of many of the overseas assets that both listed cos and ownership groups currently covet… (Or, alternatively not: this is China and a deal’s not always a deal…)
algeron — yes, actual savings. oil profits that are "saved" offshore are actual savings. and china’s foreign exchange reserve growth reflects high domestic savings — savings that the government borrows through PBOC bill issuance/ the rise in bank reserves and Ministry of Finance bond issuance.
It is NOT a global savings glut. It is a US borrowing glut.
If there is no DEMAND to borrow money, then the money isn’t lent.
And I find it fascinating how when foreign governments print money out of thin air in order to lend it to the US—this is called "savings".
This is a US borrowing glut financed largely by a glut of foreign central bank money printing.
This is NOT a global savings glut.
guest — a surge in demand for borrowing usually pushes up the price of borrowing, i.e. the interest rate. the great puzzle is why this didn’t happen to the us. and trust me, i was among those predicting it would back in 03 and 04 …
also central banks that "sterilize" reserve growth aren’t printing money. sterilization is akin to borrowing funds from the population. think of the bonds the ministry of finance issues to finance the CIC. some bonds are purchases out of funds that the population of china has set aside out of its current income — i.e. real savings.
there also may be a glut of "money’ creation from unsterilized intervention associated with the pick up in reserve growth, but that is a slightly different issue.
I disagree with kaan, the developping countries are the funders of last resort, they ultimately allowed the fed policies to happen by supporting the dollar, they are the ultimate cause of the ponzi schemes.
Brad, if you have that info, I d like to know indeed how much of the savings rise come from households, companies, and government (SOE can be accounted in companies or administration as you like).
My bet is that companies in developping coutries have saved more, beneffiting from wages not rising as fast as profits. But may be I m wrong, may be all of the savings rise is a rise in government savings. And that would be a clear sign.
DOes sterilization have an impact on savings ?
Just asking.
And of course rates will fall back to normal, and means disarray in the western world.
This is like the chicken and the egg: which one was there first.
There is nothing such as a savings glut. There is a lack of American savings. Chinese savings have compensated for the lack of American savings, which is basically what is reflected in the trade deficit.
The savings glut theory is not conclusive, because if it was, then we would not be seeing inflation rise and rise in interest rates. Furthermore, one or if not THE biggest problem is that some of the Chinese savings have not flowed into investments but have been borrowed into consumption. Here lies the problem! The problem results in "borrowed consumption investments" which do not result into earnings, which means that the flow back to China can only be restored with a massive cut in spending and accommodating spending to the manufacturing base which is able to export goods and services … as we know that is not quite the strength of the US economy.
The counterpart of the differential of Chinese savings and investments is American excess consumption.
Now we could debate who caused this mess in the first place … the FED, the US Gov., the Chinese Gov, the PBoC … they all have a responsibility towards this insanity.
The Euro proves that it was possible to have a current account well balanced while having the currency overvalued. It just meant that governments, companies and centralbanks had to stay within their means … that of course meant a deflationary or even recessionary like growth, since savings flowed outside the country to meet investments in the BRIC countries, which is reflected in the exports. If the Americans would have followed Europe, the situation in the US would have been a similar situation as in Germany and Austria, low local investments, high exports, falling wages and high savings TO asia … this ultimately would have led to massive tensions between Asia and the West … which would have addressed the real issue: Dumping currencies … instead the US decided to follow Keynsian madness which led to massive imbalances which have wrecked the American industry and savings … now the price will be honorific. No more Chemical or Steel plants in the US? I bet against that! It may take time, but it will come … and much more intense then you think …
PLEASE PLEASE FORGET THIS AMERICAN SAVINGS GLUT THEORY! It´s so wrong as wrong can be! You can also borrow into consumption!!!! Don´t ever forget that!
your dear friend,
A Friend From Germany (AFFG)
The Brad Setzer analysis is perfectly correct!
However, to align the moral connotations
with a bit more precision,
we should refer to this phenomenon not as
a savings glut but as
a borrowing orgy.
-Frederick N. Chase
AFFG — Tis true that Chinese (and Gulf) savings have compensated for a lack of American savings. tis also true that US consumption has compensated for a lack of Chinese consumption. I infer some causality from price — i.e. the absence of upward pressure on interest rates suggests that excess us consumption hasn’t stressed global savings. I also infer something from the fact that China is investing more than before at home and also financing the lack of us savings. i would push back a bit against your characterization of europe though. The eurozone is living within its means, but europe as a whole increasingly is not: see my earlier post on the rise in europe’s external deficit. Funds flowing into the eurozone from central banks have been — in aggregate — on lent to the east and helped fund large deficits there. The boom in eastern europe, in turn, has helped support eurozone exports and keep the eurozone current account in balance.
The real issue here is the prudent allocation of capital. At the turn of a previous century, the United States in the 1890’s was also a net debtor nation to Europe. However, the capital was invested more prudently in a vast network of railways, steel mills, farm production, infrastructure, etc. The enormous increase in industrial productivity paid off the borrowings and paid vast dividends for the entire nation.
In stark contrast, the latest debt splurge has been the result of an entirely unproductive bubble economy under the Greenspan-Bernanke Fed. Building bigger McMansions and gas-guzzler SUVs doesn’t improve the nation’s competitiveness one iota. An elitist bankster cartel of former corrupt government officials from the former Clinton Administration enormously profited from the financial bubble under the deregulation regime.
In exchange for millions of dollars in political contributions, former Treasury Secretary Robert Rubin deregulated the US financial services industry prior to becoming CEO of Citicorp. Robert Rubin was personally involved in the Enron-Citicorp corruption scandal. Hedge Fund associates of then Treasury Secretary Robert Rubin raped and looted the Indonesian economy in the late 1990’s leaving millions of families destitute, and creating the conditions for blowback by the Muslim world against the US. Criminal corruption at the highest levels of the US government endangers the National Security of the American people.
When Peter says:
“The pattern of these variables expresses an accounting identity and says nothing about causation.”
He, in effect, is asking a very pertinent question.
Brad notes that:
“Chinese household savings hasn’t risen (relative to Chinese GDP) to my knowledge and i doubt household savings has increased in the gulf either. the decision not to spend the oil revenue (and to accumulate external assets) was made by governments not households.”
He is certainly eliminating one beneficiary: the Chinese household. It has been on the short end of the stick, so to speak.
If we ask, “Who has the money, honey?” we can certainly include some governments and some government sponsored entities (SWFs).
I would humbly suggest that some private corporations have done very well, those who set up shop in China. That they have snagged savings that might have gone to Chinese households comes as no surprise to me. In recent years, company profits have been substantial…as have been the bonuses.
Chinese authorities repeatedly state that approx. 58% or more of Chinese exports are from foreign companies in China—much higher in terms of IT. Those companies have done well. To understand how well, we have to ask just how large the government’s take was in terms of taxation.
Which leads us back to Peter’s question about causation. Identities are fun—and obvious. But they fail to see matters with any detail.
A 1% increase in savings levels in 2007 from the average of the 1986-93 period hardly qualifies as a glut to me. If there is a glut now, then there ought to have been a glut even then. Looking back, world savings as a percentage of global GDP averaged 25.2% from 1976 to 1980, even higher than it is now at 23.7%
As noted above, the "deficits don’t matter because there’s a global savings glut" hypothesis was made by Bernanke to suit his paymasters. Bernanke made the speech on 14 April 2005 before being appointed as Greenspan’s successor. Of course, the speech’s suggestion that the world was somehow "forcing" the US to absorb savings gluts in the ROW was extremely palatable to the likes of Dick Cheney & Co. From a teleological standpoint, it is also very dubious. On 24 October 2005, Bernanke was selected as Greenspan’s successor. Mere coincidence? I think not.
Being a jobseeker myself at the moment, I appreciate that you will say what you need to get the job; deploying whoppers now and then comes with the territory. Ditto for B-B-B-Bennie of the Feds and the savings glut. There is no rocket science here.
Dr. Setser, you’ve stated in the past that China only sterilizes about half of the Yuan they use to slow it’s strengthening. That seems to me to represent significant money creation rather than saving.
"I disagree with kaan, the developping countries are the funders of last resort, they ultimately allowed the fed policies to happen by supporting the dollar, they are the ultimate cause of the ponzi schemes."
Developing countries can do nothing with USD, except buy US denominated assets.
The Ponzi scheme is that USD is the world reserve currency- it is so because: oil is priced in dollars (and one country enforces that). That is the root of the Ponzi scheme. All countries need oil, so they are forced to hold dollars. So these countries can either let their dollars rot and take the currency loss as the US debases its way out of its huge debt obligations to the Chinese, or it can buy so-called US treasuries, in which case its currency losses are reduced by 3-4%.
Until very recently, foreign firms in China were tax at 15%–or less; indigenous firms at 30%. Seems to me that foreign firms profited handsomely.
I think we have to do the math to see where the money went, if 56% of the exports were foreign companies in China.
Because of the tax deferential, their take on exports had to be more than 56%–very nice profits, if you ask me.
Western home owners thought they got a share of the pie with rising house prices…as did the financial wizards. But that was just a mirage, wealth created in quicksand.
Should be interesting now, with such high levels of national and personal debt, just how the average American will be expected to save.
The most irritating aspect of the ’savings glut’ hypothesis is its characterization as the main cause of low interest rates and global imbalances when it is only a necessary factor, but not the ultimate cause.
Let us examine the situation: we look at the balance of payments of regions and we see that the US has an enormous deficit and Asia+Middle East have enormous surpluses -both very likely unsustainable due to their abnormal levels (and in fact undergoing a correction right now). It is thus true that we have BOTH excess borrowing (a ‘binge’) in the US AND excess saving in Asia (a ‘glut’). Simple BoP accounting identity.
The key there is to understand which one came first, or whether one caused the other. If we get the causation wrong, we might recommend the wrong remedies.
The most plausible causal chain: Negative real interest rates in the US set in 2001 by the Fed (no savings glut yet) become an incentive for unlimited borrowing, and massive credit creation feeds into US excess demand. Emerging Asia, with big productive capacity gains, responds by adapting supply to this demand -which is artificial, but not perceived as such due to exchange rate intervention, sterilization and state capitalism that Brad explained well.
Expansionary US monetary policy did not generate short-term CPI inflation in the US mainly thanks to those factors. Had they been absent, both US CPI inflation and interest rates would have been higher -possibly coupled with Asian exchange rate appreciation and/or inflation. Excess savings in Asia were playing a part in the generation of imbalances (motivated by policies in Asia that were clearly not adequate for the situation, but previously considered legitimate), but it is almost unethical to dissociate them from excess borrowing in the US.
Most fundamentally, we have to remind that it is very hard to save, because for saving you need to produce. Talk about ’savings glut’ is akin to the discredited paleokeynesian notion of ‘overproduction’ as a cause of imbalances -as if production increases came out of the blue. Money and credit, however, can come out of the blue (as even Keynes emphasized).
We should discard the ’savings glut’ denomination because of its connotations as a shameless blame-shifting towards Asia (by Greenspan and Bernanke), and, if used as a simple description of excess saving (as Brad legitimately does), never dissociate it from the other side of the BoP among regions, which is the ultimate and main cause of the imbalances.
As Peter and Stormy have pointed out, the difference between National Investment and Savings is by defintion a result of a Current Account Surplus/Deficit. It is a leap to then say that surplus is caused by excess savings.
It seems strange for Brad to point this out, since in the past he has pointed out how significant exchange rates are in determining current account surpluses and deficits.
It would be foolish for the United States to try to cut its current account deficit by deciding that it was going to increase national savings until it equaled national investment. If the U.S. did do this, how would an increase in savings affect trade? Would it increase exports or reduce imports?
When economists explain current account surpluses/deficits by pointing to national savings/investment differences they are only pointing out an identity. They never seem to explain through cause and effect how national savings/investment differences could cause a current account surplus/deficit.
Mick Rolland on 2008-04-14 11:57:40
Very good comment.
points:
"Money and credit, however, can come out of the blue (as even Keynes emphasized)"
- but current and capital account balances can’t; it is 0 sum globally
"as a simple description of excess saving (as Brad legitimately does), never dissociate it from the other side of the BoP among regions, which is the ultimate and main cause of the imbalances"
- but that’s not the way Brad uses it; he attaches causality to the surplus side
It’s a meaningless debate and a meaningless concept because there is no accepted definition of or criteria for a ’savings glut’. The notion that low interest rates are evidence of a savings glut is naive in the extreme. It’s pure conjecture against a completely unknowable counterfactual. The best we can say is that there are global imbalances that aren’t good for anybody on a sustained basis. The savings glut language should be allocated to the global ash can.
It’s the typical American attitude today to blame foreigners for every US economic problem. It’s always someone elses fault. The "savings glut" by those foreigners is the lamest excuse for US economic imbalances that any irresponsible Federal Reserve patsy can possibly make. And every one of those "savings glut" US dollars was originally printed by the Fed. During the Greenspan reign, base M-1 money supply exploded 300 persent.
China and America: The Tibet Human Rights PsyOp by US Intelligence Agencies
http://www.globalresearch.ca/index.php?context=va&aid=8673
The human rights issue has become the centerfold of US media disinformation.
China is no model of human rights but neither are the US and its indefectible British ally, responsible for extensive war crimes and human rights violations in Iraq and around the World. The US and its allies, which uphold the practice of torture, political assassinations and the establishment of secret detention camps, continue to be presented to public opinion as a model of Western democracy to be emulated by developing countries, in contrast to Russia, Iran, North Korea and the People’s Republic of China.
Since the 1980s, China has become the main supplier of industrial goods to Western markets. Any threat against China and/or military venture directed against China’s Eurasian allies including Iran could potentially disrupt China’s extensive trade in manufactured goods. China’s export oriented industrial base is the source of tremendous wealth formation in the advanced capitalist economies. Where does the wealth of the Walton family, owners of WalMart, originate? WalMart does produce anything. It imports cheap labor commodities "Made in China" and resells them in the US retail market at up to ten times their factory price.
This process of "import led development" has allowed the Western "industrialised" countries to close down a large part of their manufacturing outlets. In turn, China’s industrial sweat shops serve to generate multibillion dollar profits for Western corporations, including the retail giants, which purchase and/or outsource their production to China. Any US threat of a military nature directed against China could have devastating economic consequences, far beyond the familiar upward spiral in the price of crude oil.
As long as US multinationals are willing to locate (higher and higher value-added) production abroad…
"Investment banks are shifting some top deal makers to Asia to bulk up their business in a booming region." http://online.wsj.com/article/SB120812091407811183.html
Savings glut is political cover for failed trade policy. Fed / treasury are surely aware of this but the issue is political and hence dogma trumps logic (broken theory).
"But this is not precisely the same as Bernanke’s global savings glut – even if Brad tried to equate them as a follow-up to a comment. World savings and investment averaged 22.4% of world GDP over the 1986 to 2001 period. For the 2002 to 2004 period, world savings and investment dipped below 22.4% of GDP. Recently, world savings and investment relative to GDP have increased. If we look at savings and investment as a percent of GDP for the advanced nations, we see a decline in both – especially savings."
This is the Roach analysis as well. It’s the only analysis that is correctly global.
Look, it’s exceedingly simple: in order to cling on to the money and power they presently hold, bankers need profits and politicians need donations. Both are best served by the present global agriculture situation, in which a handful of multinationals dictate everything that goes on in food markets.
That is why nothing will change; all their words are empty. They will keep on talking while millions starve, which is soon, and then they’ll talk some more. Millions have been marked down as dead. If and when basic human needs are traded in financial markets, the inevitable result is expendable people. Not only are you as much to blame for that as everybody else, including these "leaders", you are also set to become the next victims. Right here where you live.
It is also extremely cynical that it’s the World Bank and IMF which try hard to sound so worried over world hunger; these two organizations have done more to create that hunger than any other single institution or corporation.
What the world needs more than anything is new leaders. Well, actually, no, getting rid of the present ones is even more important. Meanwhile, try on this statement for size, which for many, certainly in the US, must sound like blasphemy: ”If we think that solving or emerging from the crisis means going back to the configuration of growth before the crisis, we would be making a mistake…”.
Agreeing with Mick Rolland, the concept of savings glut serves to shift attention to the supply side so to speak. You cannot put a gun to someone’s head and force them to consume (whatever the scenario in "Seven"). Borrowing and/to consume beyond one’s means is always a choice, supply responded to the demand. If there were reduced demand, excess supply will trigger off a chain of events which will ultimately reduce supply, a situation we will probably soon see. The question is how soon can a change in consumption and mindsets be effected, the switch from instant to delayed gratification is not going to be easy or pretty.
We don’t expect anything from elite anything. We don’t expect integrity or accountability. Bush has put innocent people in jail to further his political agenda. Bush has tortured people to further his political agenda. Bush has destroyed a Middle Eastern country to further his political agenda. Bush has seriously damaged American prestige, American alliances and the American dollar, to further his political agenda.
The Democratic Congress could not figure out how to stop an idiotic President. What is that about? I fear that is about a whole lot of officeholders on one side of the aisle, who are actually evil, and, on the other side, are just complacent opportunists.
The fact is, that in todays "global economy", the "the elite" don’t really care if America works at all. All we have to do is jet over to Dubai once we’re done raping and pillaging the here in the U S.
Who do you think that they built Dubai for…? Who do you think can afford to live there…?
tis true that you cannot force someone to borrow to fund current consumption. what you can do though is lower interest rates until borrowing becomes more attractive. I don’t fully understand the visceral reaction to looking at the supply side (nouriel incidentally shares it) given that sustained low interest rates suggest that easy availability of funds to borrow is a contributing force. this isn’t just a product of fed policy either — the low rates persisted even as the fed raised policy rates from 04 through 06.
frankly i would be a lot more comfortable if i thought us policies alone could reduce imbalances; that would put the united states destiny in its own hands. I don’t think it is true.
guest who says roach has the only correct — i.e. global — definition of the savings glut. if by global you mean looking at global savings and investment rates i’ll grant your point, but i don’t see its relevance. Bernanke’s argument was really much more about the world ex the United States — which isn’t really the globe. His thesis was that the ability of the US to sustain large deficits (Whether from low household savings/ big gov deficits) without putting pressure on interest rates (the usual channel low savings restricts investment and slows growth) was the easy availability of savings from the rest of the world. the "globe" always excluded the US. And I think there is reasonably good evidence that the emerging world’s savings rate only has increased since then.
for those who want to attribute it all to the US, do consider how Europe’s overall deficit has also expanded.
finally, here are a couple of easy links between the savings and investment balance and the trade deficit: high investment = hiugh demand for imported capital goods/ often high demand for raw materials (iron for steel, etc); low savings (household savings) = high consumption and high demand for imports; a big fiscal deficit = low gov. savings and also lots of demand for imports. The links between the exchange rate and the savings and investment balance are harder to lay out quickly, but i think martin wolf has done a better job of explaining them than anyone.
The savings glut issue has two parts. One, the savings surplus of oil producers, is obvious and trivial. Saudi Arabia, Russia, Norway, or even Exxon sell oil for dollars. If they do not immediately spend the revenues, they contribute to global savings, and therby put upward pressure on bond and asset prices.
The other, which is more profound, involves China’s intervention and sterilization policies; it is not widely understood, (there is debate as to whether it produces a ‘money glut’ or a ’savings glut’). Until recently, the Chinese central bank has been attempting to have both a fixed exchange rate and an independant monetary policy, which, as Robert Mundell has argued, is bound to fail. The recent rapid advance in the renminbi exchange rate may indicate that the Chinese authorities now recognize the folly of their sterilization policy. By sterilizion–issuing steriIzation bills– the too rapid growth of domestic spending and inflation that otherwise would result from the issuance of renminbi ‘out of thin air’ to buy dollars was suppressed. Instead, Chinese citizens were forced to ’save’ the newly issued (and inflationary) spending power. Private sector purchases of newly issued government obligations (sterilization bills) financed Chinese government puchases of foreign bonds and other assets. Note that the balance sheet of the Chinese central bank, which was inflated to purchase dollar assets, remains enlarged even if the duration of the liabilities is lengthened. Intervention is always an inflationary policy. Chinese sterilization transfered the inflationary intervention into the global credit and asset markets, driving down global interest rates (the conundrum) and stimulating borrowing. As a consequence, the global economy has been in, and continues to be in, an inflationary boom, which Mr. Bernanke fails to recognize.
"I don’t fully understand the visceral reaction to looking at the supply side (nouriel incidentally shares it)"
Well, I think the following explains it extremely well, from:
http://www.rgemonitor.com/blog/roubini/117412/
Orwellian Chutzpah and Doublespeak in the Economic Report of the President: the US Current Account Deficit Becomes the "US Capital Account Surplus"
Nouriel Roubini | Feb 13, 2006
Paul Krugman has recently written about the Bush Administration attitude of
changing unpleasant facts that do not square with its ideological
biases. A recent example was the attempt to use the
nebulous concept of "dynamic scoring" to "prove"
- using "voodoo economics" cabal - that tax cuts
actually increase revenues while all respected empirical studies
show that such cuts reduce, on net, tax revenues.
But the latest example of this Orwellian doublespeak is the Economic Report of the President (ERP) published today by the White House Council of Economic Advisers. Its chapter on international macro issues is titled "The U.S. Capital Account Surplus" when the more appropriate and honest title would have been "The U.S. Current Account Deficit"
. While Ben Bernanke’s name is nowhere in this year’s ERP, his heavy
hand in this chapter - and the rest of the ERP - is clear.
His 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.
Also, the "capital inflow driven by superior U.S. returns"
interpretation of the global imbalances ignores a few unpleasant
facts.
First, the inflow is mostly in the form of debt -
i.e. borrowing - rather than equity - FDI and equity portfolio inflows;
such equity flows have been outflows out of the U.S. to the tune of
$200b net per year for the last few years. So much for the
foreigners investing in our superior capital.
Second, the performance of the US equity markets since 2000 has been
dismal both in absolute terms and relative to returns in emerging
markets and even Europe and Japan. So much for the superior
returns on U.S. assets.
Third, the fact
that U.S. net factor income payments have been until now
positive in spite of the U.S. being a net debtor country is
explained by the fact that recorded returns by the U.S.
on its foreign assets are much higher than foreign returns on
their holding of U.S. assets. So much for the superior returns of the
high growth U.S. assets.
Fourth, most of this "inflow" (call it more properly borrowing binge) is
coming on net not from willing private foreign investors
wanting to invest in U.S. assets but rather from political agents,
i.e. foreign central banks that are oblivious to the low
returns on U.S. Treasury bills and bonds (and capital losses once
the dollar falls) and are lending cheaply to the U.S. Treasury. So
much for the rest of the world wanting to buy U.S. assets and we thus
generously running a current account deficit to accommodate this
portfolio demand for U.S. assets.
The ERP makes a token passing remark to the fact that the US capital account "surplus" is matched by
a shortfall of savings relative to investment. But after grudgingly
acknowledging that a shortfall of public savings (i.e. a fiscal
deficit) may cause a current account deficit, it goes - like Bernanke
did in his glut speech - on trying to argue - based on a
calibration, not econometric, study done by the Fed - that fiscal
policy has little effect on the current account. Of course, if you
build and calibrate a simulation model where infinitely lived
agents are Ricardian, by definition you will get the result that fiscal
policy has no effects on the current account (it is like proving
the result by assuming it by the choice of Ricardian consumers).
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. We will
see his testimony to Congress this week…
"sustained low interest rates suggest that easy availability of funds to borrow is a contributing force"
sustained low interest rates have also correlated quite well with the fact that the sun hasn’t exploded since since Volcker beat inflation
"this isn’t just a product of fed policy either — the low rates persisted even as the fed raised policy rates from 04 through 06."
No so. This is a distortion of history that is also particularly favored by Greenspan and Bernanke.
Look back at the history of the yield curve. When the Fed started to tighten from a 1 per cent funds rate, the curve was at a near record steepness. Fed funds to 10 year treasuries were more than 300 basis points, or triple the level of the funds rates.
The Fed was way behind the curve. Bond yields actually lead the funds rate up. The notion that the savings glut prevented bond yields from rising was ridiculous. Bond yields were already there, anticipating and forcing the fed to move up. This was a matter of pricing in inflation expectations and the required path of short rates. It had nothing to do with the flow of funds. The actual fed move was 425 basis points. Policy had been tightened. The funds rate was 425 per cent above its opening level. The associated temporary "bond yield conundrum" was merely correctly pricing in the next phase of the cycle. Look where we are now. Bond pricing had it right. It had nothing to do with the ‘global savings glut’.
"guest who says roach has the only correct — i.e. global — definition of the savings glut. if by global you mean looking at global savings and investment rates i’ll grant your point, but i don’t see its relevance. Bernanke’s argument was really much more about the world ex the United States — which isn’t really the globe."
It’s totally relevant because this is exactly the point. "It isn’t really the globe" is exactly right, which is why the tag "global savings glut" used repeatedly by Bernanke is an Orwellian lie, as Roubini effectively pointed out. As soon as you tag it as global, even though its not global, the analysis becomes meaningless. That’s why Roach’s analysis is meaningful and intellectually honest - because his premise is based on a global concept. It pretty much complements Roubini’s analysis at the US level.
It shouldn’t all be attributed to the US. But the US role shouldn’t be ignored, which you tend to do. And the US as the (previous) engine of the world economy arguably had a great role than the surplus nations.
Those who bought the products from Walmart that drove the deficit tended to finance it by mortgage equity withdrawals, as per the Greenspan credit magic. Surplus nations facilitated the return flow through low risk treasuries. Sure, they saved instead of spent, and sure their central banks were the driver of the savings via manipulated exchange rates. But the source of US demand for imports was the great US internal financing mechanism that was the precursor of today’s credit crunch.
Indeed, the credit crunch and the internal breakdown of the US financial system is obvious proof that it was US forces that drove the consumption glut and resulting current account deficit, and that the surplus nation recycling was only the tail of the dog.
Case not Closed on the "Global Savings Glut"
And, very much to the point, Stephen Roach just today, as blogged at Economists View:
"Increasingly supported by the confluence of both property and credit bubbles, U.S. consumers spent well beyond their means. Personal consumption climbed… At the same time, household debt soared… America certainly achieved the rapid growth that Greenspan felt the body politic wanted. But it was growth based increasingly on fumes. …
Saving rates plunged to zero for the first time since the Great Depression. An increasingly asset-dependent U.S. economy then had to borrow surplus saving from places like China … Greenspan and his disciple Ben Bernanke saw this situation exactly backwards. America, they insisted, was simply doing the rest of the world a huge favor by absorbing its surplus saving. Serious dollar risks were characterized as a problem for a distant day. Suddenly, that day doesn’t seem so distant.
What Greenspan missed repeatedly over the years … are the corrosive impacts this bubble had in fostering the imbalances and excesses of an asset-dependent U.S. economy. … Global imbalances are also an outgrowth of this era of excess—underscored by America’s massive external deficit and, by the way, the protectionist fires it stokes. Alas, these fault lines were made all the deeper by the Fed’s regulatory laxity in an era of unprecedented financial innovation—a laxity made all the more dangerous by the cheap borrowing costs of a Fed-induced credit bubble. …"
http://economistsview.typepad.com/economistsview/2008/04/greenspans-foll.html
I would grant that US fiscal policy contributed to strong import growth from 02-04. That expanded others trade surpluses in the first instance. Normally a fiscal expansion amid low domestic savings would push long-term rates up. Didn’t happen. long-term ratse stabilized at levels well below in the 90s. Tis true that the curve was very steep for a while. But when the fed raised, long-term rates hardly moved up at all. and for a long-time the curve was inverted. US fiscal policy even turned contractionary. The purely US explanation has trouble in my view from 04-06. Now the US is clearly not driving a rise in global savings — us is contracting, imports are falling. overall savings is still rising. I don’t quite see how bad US policy can explain the 05-07 rise in europe’s deficit.
I do agree with one big part of Nouriel’s criticism of the ERP. tHis influx had nothing to do with superior US financial market performance/ the great appeal of US markets. It had everything to do with a big upsurge in official intervention — itnervention that both pushed up savings rates to reduce pressure on exchange rates (China’s fiscal improvement, the undistributed profits of the SOEs and credit curbs) — and the big uptick in oil savings. All were initially directed into dollar assets despite low returns on us assets.
But objectively, I think the absence of pressure on global rates from us deficits is an important piece of evidence. the imf back in 03 predicted that the cost of big us deficits (fiscal and external) woudl be higher rates globally. hasn’t happened.
what does seem to be happening instead is that the us is exporting inflation to the emerging world — especially the dollar peggers. that may bring down East Asian savings and end up forcing adjustment.
“Normally a fiscal expansion amid low domestic savings would push long-term rates up. Didn’t happen. long-term ratse stabilized at levels well below in the 90s. Tis true that the curve was very steep for a while. But when the fed raised, long-term rates hardly moved up at all. and for a long-time the curve was inverted.”
I think if you track the move in fed funds and the bond market from the point the fed started to raise rates, you will find that the bond market did a reasonably good job in tracking the implied forward rates for fed funds. Not perfect, but reasonable –this as opposed to the historic idea that bonds yields must go up and stay up after the fed starts to tighten. As noted, the curve was at record steepness when the fed started its most recent tightening. In fact, bond yields further out the curve were too high, given the return of fed funds back to where they are now, and probably headed lower. The bond market has become far more astute at forecasting the fed funds rate over the years. This is the modern day version of the “bond vigilantes”, who used to punish the market for fear that the Fed wouldn’t tighten enough. That’s long gone. This is why I was always puzzled as to why Greenspan was puzzled. He didn’t learn.
This change is a function of the forces of disinflation and deflation that have been in place since Volcker. This creates a completely different data set trend in recent years than the longer term history of interest rate responses to short rate monetary tightening. The response of the most recent tightening cycle was totally different from the 1993 tightening cycle, for example. The reason is the bond market’s correct read on progressive disinflation.
Many fear a renewed breakout of inflation. It may well be happening outside the US. That’s because their markets are lousy and inflexible compared to the US, even with all its warts. As a generalized inflation process, this can only happen within the US if wages join the inflationary process, as they did in the 70’s. I doubt it. I would look instead for the impact of very high food and commodity prices to be deflationary. This will cause a crack in foreign demand for both. And adding to the deflationary pressure, the US housing market as a source of asset wealth is finished for the next 10 years if not longer.
tis true that you cannot force someone to borrow to fund current consumption. what you can do though is lower interest rates until borrowing becomes more attractive.
Brad, the problem isno one can force another to borrow, however attractive the terms. Being lured into a loan is hardly in the way of duress. Would anyone in their right minds take out a loan they don’t need just because the terms are attractive?
I don’t fully understand the visceral reaction to looking at the supply side (nouriel incidentally shares it) given that sustained low interest rates suggest that easy availability of funds to borrow is a contributing force.
Looking at supply side is fine as long as the overtones of that aren’t an absolution of the demand side. It comes round to the issue of pursuing instant gratification- why bother to wait or save when a loan gets you what you want instantly?
QE et demonstratum?