Brad Setser

Brad Setser: Follow the Money

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

The savings glut. Controversy guaranteed.

by Brad Setser
June 30, 2009

Few topics are quite as polarizing as the “savings glut.” The very term is often considered an attempt to shift responsibility for the current crisis away from the United States.

That is unfortunate. It is quite possible to believe that the buildup of vulnerabilities that led to the current crisis was a product both of a rise in savings in key emerging markets, a rise that — with more than a bit of help from emerging market governments — produced an unnatural uphill flow of capital from the emerging world to the advanced economies, and policy failures in the U.S. and Europe.

The savings glut argument was initially put forward to suggest that the United States’ external deficit was a natural response to a rise in savings in the emerging world – and thus to defuse concern about the sustainability of the United States’ large external deficit. But it was equally possible to conclude that the rise in savings in the emerging world reflected policy choices* in the emerging world that helped to maintain an uphill flow of capital – and thus that it wasn’t a natural result of fast growth in the emerging world. This, for example, is the perspective that Martin Wolf takes in his book Fixing Global Finance. Wolf consequently believed that borrowers and lenders alike needed to shift toward a more balanced system even before the current crisis.

From this point of view, the savings glut in the emerging world — as there never was much of a global glut, only a glut in some parts of the world — was in large part a result of product of policies that emerging market economies put in place when the global economy — clearly spurred by monetary and fiscal stimulus in the US — started to recover from the 2000-01 recession. China adopted policies that increased Chinese savings and restrained investment to try to keep the renminbi’s large real depreciation after 2002 – a depreciation that reflected the dollar’s depreciation – from leading to an unwanted rise in inflation. The governments of the oil-exporting economies opted to save most oil windfall – at least initially. Those policies intersected with distorted incentives in the US and European financial sector – the incentives that made private banks and shadow banks willing to take on the risk of lending to ever-more indebted households (a risk that most emerging market central banks didn’t want to take) to lay the foundation for trouble.

On one point, though, there really shouldn’t be much doubt: savings rates rose substantially in the emerging world from 2002 to 2007. Consider the following chart – which shows savings and investment in emerging Asia (developing Asia and the Asian NIEs) and the oil exporters (the Middle East and the Commonwealth of independent states) scaled to world GDP.

savings-glut-weo-09-6-1-redone

Investment in both regions was way up. But savings was up even more.

It is unusual for Asia and the oil exporters to show large surpluses at the same time. In 98 the fall in oil prices helped Asia and hurt the oil exporters; in 2000 the rise in oil prices helped the oil exporters and hurt Asia. And way back in 1980, Asia ran a deficit that helped offset the oil exporters’ surplus.

savings-glut-weo-09-2

The main reason for the rise in emerging Asia’s savings is simple: China’s GDP rose relative to world GDP, and China’s savings rate rose relative to China’s GDP

The chart is from Stephen Green of StanChart; used with permission

The result was a very large increase in the aggregate savings of the emerging world – especially after 2003. The rise in the combined surplus of Asia and the oil exporters that followed the Asian crisis was around 0.5% of world GDP. The post 2003 “China boom” pushed the combined savings rate of the oil exporters and emerging Asia up another 1% of world GDP.

All my data, incidentally, comes straight from the IMF’s WEO data tables. All I did was to multiply the data on savings rates by regional GDPs and then scale the resulting dollar figure to world GDP in dollars.

That disaggregated data is almost as striking.

It shows, for one, that the “investment drought” argument applies far more to the Asian NIEs (Korea, Taiwan, Singapore, Hong Kong) than to the rest of Asia. Investment in some countries may not have recovered from the 1998 crisis, but the overall data is dominated by the huge rise investment in developing Asia (read China). Plotting the rise in billions of dollars – rather than as a share of global GDP – makes the scale of the rise in investment in developing Asia over the past few years clear.

savings-glut-weo-09-51

Savings and investment in India both rose. And China went from a $1 trillion economy investing 30 to 35% of its GDP to a $4 trillion plus economy investing close over 40% of its GDP …

It is also striking that investment in the Middle East was essentially stagnant, in dollar terms, from say 1980 on. That meant that is was falling as a share of world GDP – and certainly falling relative to the Middle East’s population. Comparisons with the “boom” level of 1980 is a bit unfair, but it still isn’t hard to see why the region stagnated when oil prices stagnated.

And it also isn’t hard to see why the region boomed when oil prices soared, as the rise in oil revenue financed a boom in investment. The scale of that boom – in dollar terms – is rather impressive.

savings-glut-weo-09-4

The net result: the global economy prior to the crisis was characterized both by high levels of both savings and investment in Asia and the oil exporters and by high levels of consumption and low levels of savings in the US.

In a global economy, a rise in savings relative to investment in one part of the world necessarily implies a fall in savings relative to investment in the rest of the world; sorting out why key macroeconomic variables change is always difficult.

Maybe this equilibrium was a function of excessive demand stimulus by the advanced economies in the aftermath of the last recession – and lax financial regulation that allowed households to over-borrow. High US and European demand allowed the emerging world to save more. Maybe it was a function of policies in the emerging economies, policies sometimes put in place to support undervalued exchange rates. That would explain why the growing US savings deficit didn’t put upward pressure on global interest rates and why the rise in the US external deficit didn’t lead to a rise in US real interest rates — something would have short-circuited the housing boom. Probably it was a mix of both. Emerging market savers (really their governments, as private savers weren’t exactly seeking out depreciating dollars) helped to provide Wall Street and the City the rope they (almost) used to hang themselves.

No matter. We don’t need to assign responsibility for the imbalances that marked the pre-crisis global economy to know that the chain of risk-taking that allowed emerging market savers to finance heavy borrowing by US households didn’t result in a stable system.

* Policies that increased savings in China include a tight fiscal policy and the reforms that increased the profitability of the SOEs, creating a new source of business savings. No comparable reform was put in place to have the SOEs pay dividends (or to use the dividends to support say a social safety net), so the rise in business savings in effect freed up household savings to be lent abroad (with a lot of help from the state banks and the PBoC). Policies that reduced investment include the rise in the banks’ reserve requirement — which meant that Chinese banks had one of the lowest loan to deposit ratios in the emerging world going into the global slump — and more generally the restraints on bank lending. The governments of most oil-exporting economies also saved a large fraction of the oil windfall, especially in 2004 and 2005. Over time discipline waned a bit, but the rise in spending and investment didn’t quite keep pace with the rise in oil prices.

72 Comments

  • Posted by David Beckworth

    Brad:

    Nice balanced post where you acknowledge both the pull and push forces. I suspect you were inspired, in part, to write this post in response to the recent one by Menzie Chinn. I too was inspired by his post and wrote this piece in response.

  • Posted by Thomas

    Singapore is possibly the most extreme case of a “savings glut” country: The savings rate is extremely high, but the investment rate has dropped to “Western” levels. As a consequence, the current account surplus has recently increased to nearly 30 % of GDP.

    If that’s where China is headed in the longer run (savings stay high, but investments drop), then the world will be facing one hell of a savings glut…

    http://miscellaneous-economic-ramblings.blogspot.com/2009/06/savings-and-investment-singapore.html

  • Posted by glory

    skidelsky, i do believe, has ‘nailed’ it :P

    http://www.nybooks.com/articles/22898

    even DC i think would agree with his narrative!

  • Posted by bsetser

    David — I was inspired by Menzie, and Jeff Frankel too. He pushed me to finish up some work i had been doing based on the WEO data.

  • Posted by q

    i have a basic question about this. what if the US had had a reasonable savings rate in the last decade? ie why are a large amount of asian savings a problem — is it the because they are external or is it because they are too much money?

  • Posted by 罗臻

    What of chart 2 on page 4 of this report:
    Global Savings, Investment, and
    World Real Interest Rates

    It shows total global savings rates declined into the 2000s.

  • Posted by Rien Huizer

    Brad,

    Another excellent post on a very difficult topic. Whoever causes savings gluts (the saver or the glutton?) in the world economy is a difficult question. But does it matter? The most important thing is that actors get the appropriate signals. During the past say 6 years, tese signals were pretty distorted, hence the need for correction. Good government (Singapore for instance) wpuld not have let this happen, but how do you do good government in a big country, or, for that matter, the world, where there is no space to dump waste?

  • Posted by kharris

    I suspect that the decision among “Asian Crisis” victims to save far larger amounts relative to GDP reflects the IMF response to that crisis. Countries suffering from a recessionary credit disruption were told to adopt recessionary domestic policies as a condition of receiving IMF help. At least one government fell because of that situation. If governments see the risk of another such episode as unacceptably high, then they will respond in a way that makes a domestic credit crisis and help from the IMF less likely. Running up very large reserves does this. Since it has worked out that this has coincided with rapid growth, all the better. In fact, all that was missing to make the accumulation of reserves a growth factor was strong demand from abroad. The US provided that demand.

  • Posted by Cedric Regula

    I think the world is flat, and looks like a great big circuit board. But that is because I’m not an economist.

    But my circuit board has an on-off switch and when you turn it on it goes thru a boot-up routine in all the microprocessors, each running sovereign firmware, and then we finally have the board running.

    It was Greenspan who threw the on-off switch and connected US consumer credit to the board. After that event we have all either heard or noticed how the board operated from there.

  • Posted by Lemmiwinks

    The investment rate of China was 57% of GDP in 2008 according to the statistical buerau of China.
    GDP 30 trn, consumption 10trn, net exports 2 trn, fixed asset investment 17.2 trn.
    Gross savings in the Chinese economy are hard to catch, because only a fraction of investments are financed from bank loans. Almost 80% of all investment in China is financed from cash flows.

  • Posted by bsetser

    To fan of the Bank of Canada’s paper –

    the term global savings glut was a misnomer; it really was an EM savings glut.

    the best source of this is the IMF’s WEO, table A16

    http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/tables.pdf

    global savings from 06-08 was a bit above its 95-02 average (24% v 22%).

    advanced economies saving was a bit below its long-term average (20% v 21% of GDP), with savings rates especially low in the US (particularly in 08!)

    emerging economies savings rose steady from 03 to 08, and in the 06-08 period were about 10 percentage points higher than their long-term average (34% of EM GDP v 24%).

    That to me is the “savings glut”; tis entirely an EM thing, with the offsetting move that balanced the global economy coming in no small part from a fall in US national savings. Determining casuality is hard — though i would agree with Bernanke, Wolf and Summers that low real rates offer a hint.

    I haven’t tried to reconcile the BoC data with the IMF data. Some of it may be a question of timing; the rise in EMs savings was especially pronounced in the 06-08 period (when both China’s current account surplus and the oil exporters surplus soared)

  • Posted by bsetser

    q — a higher savings rate in the US would have required offsetting adjustments elsewhere. higher savings means lower consumption — so less demand for the world goods (And its oil). lower income might have meant lower savings, as countries outside the US consumed the same but earned less b/c of less US demand. Higher savings in the US also would have put downward pressure on global interest rates, encouraging others (whether in the us or in the world) to invest more or save less …

  • Posted by FollowTheMoney

    China still years away from making up consumption drivers. as long as China needs to depreciate, manipulate her currency you know the country is overly dependent on exports.

    The world will need to readjust. There’s no way out of this one.

    One major change i note is that when i take the subway, the 6 or 4/5 train uptown/ downtown i notice very few people have consumer merchandise bags with them from retail outlets.

    this is different from a few years ago, I always remember having a hard time finding a seat on the MTA because people had so many bags. Ok maybe this is a weak indicator, but surely something i have paid attention to.

    Everyone i know is certainly cutting back on spending, it’s now psychological. Of course you have the young hamptons crowd still drinking champagne and discussing how great the 09′ bonuses they expect, but this is a small fraction of our population. Things are surely changing and the readjustment in U.S. consumer savings will increase.

    this leads me to believe people, in general are scared of loosing jobs. that they are uncertain, that they are looking at credit card debt, mortgage and worried. People are waking up, but the big shockwaves are yet to come.

    My linguistics suggest very few people in the corporate sector really analyze this readjustment. There’s alot of emotions.

    Who’s to blame? Well, how about taking a few recessions instead of constantly popping a pill to feel better. The problem now is the patient is terminal, and in my view, no pill will be good enough to cure this one.

    In my view, watch exports continue to fall off a cliff as U.S. consumers save save save, and also pay attention to weak corporate outlooks for consumer retail goods (unless in my view the books are being cooked).

  • Posted by Thomas

    @Lemmiwinks

    as of 2007, NBoS tells us that China’s investments were 42 % of GDP, and its consumption was 49 %.

    Where did you get the 57 % number for 2008?

  • Posted by Ying

    Here are some of the reasons individual and business save more in Asia:
    -Lack of profitable projects for business.
    -Government’s fiscal policies to curb speculative investment bubble
    -Low job prosperity
    -Poor social safety net
    -High social tension between interest groups

    Congratulation, the developed countries now start to join the saving club!

    The structural trade US deficit lasts almost thirty years. For British Columbia in Canada, it lasts twenty years. For developing countries, most of them weren’t successful in reducing poverty significantly except China and a very few other stars. Saving glut is more of an symptom of global trade and finance structure rather than causes.

  • Posted by JKH

    It’s interesting that the totality of global CA imbalances remains fairly marginal relative to global saving and investment.

    Ball park the former at $ 1 trillion?

    The latter at $ 10 trillion?

    Not sure what it means, except that the former (regional) is the size of the geographic mismatch in the latter (global).

    Very interesting graph on Asian vs. oil exporters saving surpluses; it clearly shows the oil series as volatile and the Asian series as a more stable trend.

    It seems to me that China’s saving surplus is forced by PBOC operational intervention in current account flows. To what degree does the Chinese private sector even have the option of adjusting its current account participation when this is the case? To that degree I think the positioning of US current account funding as “reliant” on official flows requires more nuance.

    I view the US domestic financial system as the dog and foreign saving as the tail in the story of US household borrowing and spending. Foreign savers are the recipients of dollars provided to US households by the US financial system. Foreigners adjust their portfolios by purchasing Treasuries and whatnot, but they could always leave their money “in the bank”. The portfolio adjustment is a consequence of the current account deficit, not a requirement in order to fund it.

  • Posted by FollowTheMoney

    @ Ying,

    Yes U.S. moving toward savings model, but this is going to take at least a decade to get to levels we should be. And in that decade alot savings will go pay back debt.

    the problem we have is non-international U.S. domestic-only corporations are going to suffer.

    The markets u.s. corporations need to enter (where consumers may spend more years out) are largely prohibited.

    Even Google, for example with great international presence is having a hard time in China. Despite there U.S. experience being superb to that of other brands, the Chinese government at any time can pull the plug. It’s not going to be easy tapping the Chinese consumer market. There’s an ole school savings train of thought, and a great deal of nationalism toward domestic brands.

  • Posted by don

    db – you seem to consider AG’s actions as exogenous. But to maintain U.S. aggregate demand and forestall unemployment required more easing than would otherwise have been the case after the dotcom bust, owing to massive currency inrterventions in Asia (especially Japan and China) which caused a big part of the effect from stimulatory U.S. monetary and fiscal policies to leak out through the current account balance. They were playing the old competitive devaluation game, but instead of responding in kind, the U.S. undertook expansionary monetary and fiscal policies that ‘enabled’ the Asian currency actions.

  • Posted by FollowTheMoney

    just change in language, markets u.s. based corporations need to enter face difficulty, no prohibited (at least yet…:)

  • Posted by Cedric Regula

    Brad:” a higher savings rate in the US would have required offsetting adjustments elsewhere. higher savings means lower consumption — so less demand for the world goods (And its oil). lower income might have meant lower savings, as countries outside the US consumed the same but earned less b/c of less US demand. Higher savings in the US also would have put downward pressure on global interest rates, encouraging others (whether in the us or in the world) to invest more or save less …”

    My circuit board thinks it could have worked like this, if US firmware was soundly designed.

    Here’s where it differs..

    Brad:”Higher savings in the US also would have put downward pressure on global interest rates, encouraging others (whether in the us or in the world) to invest more or save less …”

    Higher savings in the US replaces recycled dollars, so no net change in interest rates from additional US savings. But now the US does have personal savings and the places it may go are more varied than where central banks put it. Could go into equity, local banks…etc..and if the average US saver is allowed to get some return on savings, rather than give to a big bank for free that uses it to fund carry trades or other self serving foolishness, the we distribute returns on money in a much more equitable manner.

    Then the government usually notices when the citizenry is accumulating money and decides it’s time to raise taxes to close the fiscal deficit.

    Next thing you know we have smaller twin deficits, and interest rates all moving to sustainable levels.

    China would not have a manufacturing boom/bust and overcapacity.

    Maybe we could have avoided the SUV thing and making the Middle East rich again, but my circuit board thinks that needs a regulator probably.

    My circuit board thinks that when we decide to “jumpstart the economy”, we need to think about who’s economy we are jumpstarting.

  • Posted by 罗臻

    Re: BoC data
    Thanks for your response.

    If this is just an EM story, then is this a replay of the 1970s petrodollars funneled into bad debt in Latin America?

  • Posted by bsetser

    BOC — no. in the 70s petrodollars were funneled into other emerging economies via Western banks. The uS didn’t run a current account deficit. in this decade petrodollars were funneled into the us and europe where they financed housing and consumption booms.

    Winterspeak – thanks for the link

    http://www.winterspeak.com/2009/06/global-savings-glut.html

    I realized after reading it that I garbled by second paragraph (which i edited too many times); if have edited it now and it should make more sense. would appreciate updating the quote in your blog as well (couldn’t see a comment feature on your blog)

  • Posted by ReformerRay

    How many of the commentators have read the original Bernanke 2005 article? Look only at the one table he presented. He showed that several emerging nations had a trade surplus between 2000 and 2004. This was a new thing. The notion that a positive current account balance is a savings glut was an invention of Bernanke. The notion that this change of events (moving from a trade deficit to a trade surplus) CAUSED the U.S. trade deficit is a stupid idea, invented by Bernanke.

  • Posted by K T Cat

    Did AAPL and MSFT have a savings glut? What imbalances and catastrophes did that lead to?

  • Posted by ReformerRay

    The U.S. had a trade deficit for at leat two decades before 2000.

    Causation is a tought subject. The one thing we know is that a cause must precede the controlled event. No way the trade surplus that emerged after 2000 could have been responsible in any shape or form for the long standing U.S. trade deficit.

  • Posted by ReformerRay

    In addition to the timing issue, the maginitude issue works against Bernanke causation assummption.

    Between 1996 and 2000, the developing Asian countries improved their Current Account Balance by 128 billion while the U.S. increased its deficit by 293 billion.

    Between 2000 and 2004, the developing Asian countries improved the Current Account Balance by 93 billion while the U.S Current Account Balance wen ad additional 253 billion in the red.

    On way a small gain can be responsible for a much larger loss.

  • Posted by FollowTheMoney

    “in this decade petrodollars were funneled into the us and europe where they financed housing and consumption booms.”

    they were also funneled into alot of jobs where employees spend 50% of there workday looking at facebook.

    we need to start producing “real products”…so that we can be “real consumers”

    making 80K a year looking at computer the entire the day where the employee spends half as day on facebook won’t cut it…

  • Posted by Twofish

    bsetser: a higher savings rate in the US would have required offsetting adjustments elsewhere. higher savings means lower consumption — so less demand for the world goods (And its oil).

    This doesn’t follow since it confuses consumption with demand. If you have a higher savings rate and that savings is channeled through the banking system into investment, then you end up with the same or even higher goods consumption and oil. They may be different goods (capital goods rather than consumption goods) but they are still goods.

  • Posted by Twofish

    FollowTheMoney: Even Google, for example with great international presence is having a hard time in China.

    It’s not having a terrible time, and the reasons why google is having a hard time is that local competitors can do things that google can’t (such as link to mp3′s).

    FollowTheMoney: Despite there U.S. experience being superb to that of other brands, the Chinese government at any time can pull the plug.

    They really can’t without cost. If the Chinese government pulls the plug, that means loss of local jobs. It may be worth it for some things, but not for others.

    FollowTheMoney: It’s not going to be easy tapping the Chinese consumer market.

    Not much worse than any other consumer market.

    FollowTheMoney: There’s an ole school savings train of thought, and a great deal of nationalism toward domestic brands.

    1) No there isn’t, and it’s a myth that Asians are more prone to save than Westerners. People that grow up in poverty will tend to save more, but you have an entire generation of Chinese that didn’t grow up poor.

    2) Also, with respect to consumer products, there is a huge amount of *anti-nationalism* among Chinese. American brands are widely considered to be of better quality and better service than local brands. Something that is somewhat jarring if you go into a Shanghai supermarket are stacks of fruit with American flags next to them, since American (and Australian) agricultural products are widely considered to be superior than local ones.

  • Posted by Ying

    FollowTheMoney:

    The economy is structurally unproductive. At the individual level, most of people are very productive. On an aggregated level, many industries are extremely unproductive and expensive. The most unproductive industries include finance, advertising and marketing, auto transportation, health care system etc. There are better ways to design the system to better serve human’s needs. Unfortunately,the Americans always think things on an individual level and love to use “market mechanism” (carbon trade for example)to solve problems. The whole system is just now too expensive to operate.

    Now everyone is cheerful that Americans are saving money now and trade deficit is shrinking while they are losing home, job and everything. It’s really a funny world.

    Anyway, please let me know if there is a job that pay even 40k a year. I promise that I won’t look at facebook half a day.

  • Posted by Ying

    Twofish:

    The tide is changing in a different direction. Regional cooperation and localization are more popular these days.

    For consumer products, you do have to think consumer culture and tradition quite a bit. American and western culture used to be very popular, I doubt that it will continue to influence people’s purchasing habit the same as before. For low income families, they love to save. So don’t count their purchasing power.

  • Posted by FollowTheMoney

    @ Twofish,

    would it truly cost jobs? the loss of one entity leads to the expansion of another.

    I’m hopeful on Google, but but but…

    @ Ying

    Come to Manhattan…40K a year here and yes you’d be truly working..move above 80K and you probably have a secretary, giving you plenty of facebook hours.

    in my view, from what i’ve heard employers pretty much just look for “facetime”..that’s the term. on an 8 hour schedule work may take 3-4 hours if you really “worked”.

    let me just point the picture, it wasn’t long ago secretaries were getting 250K a year to answer the phone and order plane tickets a few hours a day at some funds…

    people can say what they want, but where else in the world can someone by the age of 30 make more than than the entire career of his/her parents and grandparents combined shuffling paper? Only in Manhattan.

    We should be greatful that until today, we’ve had the great privilege of U.S. Dollar global reserve. Without it, things would be very very different…certainly alot less facebook hours on our “facetime”….

  • Posted by Twofish

    Ying: American and western culture used to be very popular, I doubt that it will continue to influence people’s purchasing habit the same as before.

    Nothing is permanent in business and local companies catching up to Western and American companies. But competition is a good thing.

    FollowTheMoney: would it truly cost jobs? the loss of one entity leads to the expansion of another.

    In the short term yes, since google employs people in China. If the Chinese government didn’t want google in China, it wouldn’t have allowed it in there in the first place.

    For consumer products, you do have to think consumer culture and tradition quite a bit. American and western culture used to be very popular, I doubt that it will continue to influence people’s purchasing habit the same as before.

    FollowTheMoney: in my view, from what i’ve heard employers pretty much just look for “facetime”..that’s the term. on an 8 hour schedule work may take 3-4 hours if you really “worked”.

    In finance people typically work 10-12 hours a day. People do personal stuff from work, but they also do business stuff at home so it all balances out. If you are spending half your time looking at facebook, you are also likely spending the other half working on your resume since your job is about to disappear.

    Also you aren’t going to survive in NYC on $40K and it will be tough on $80K. And you aren’t going to have a secretary.

    FollowTheMoney: people can say what they want, but where else in the world can someone by the age of 30 make more than than the entire career of his/her parents and grandparents combined shuffling paper? Only in Manhattan.

    It’s quite common in China for people to make more money by age 30 than their parents and grandparents combined by shuffling paper.

  • Posted by WStroupe

    I think the emerging economies’ “savings glut” is working with other factors to actually help these economies begin to accomplish decoupling. I’ve been promoting this idea of ‘decoupling reborn’ for a few months, and now some real heavyweights (of which I’m certainly not) are really getting tuned-in to the idea, based on some early but hard data, and based upon their own independent analysis. See here: http://www.nytimes.com/2009/07/01/business/economy/01decouple.html?pagewanted=1&_r=1&partner=rss&emc=rss

    My view is that we are now moving through an important transition period in the global economy, one with truly strategic implications, and while we’re in this transition period it’s possible for many experts to still run with the old ideas (America uber alles in an economic and financial sense), and point to data to prove their case.

    But the transition is inexorably proceeding, and much faster than almost anyone imagined, and those with the new ideas (like decoupling reborn) of where the global order is going are the ones that will come out on top.

  • Posted by FollowTheMoney

    Twofish-

    “It’s quite common in China for people to make more money by age 30 than their parents and grandparents combined by shuffling paper.”

    yes, and it’s also more and more unlikely this will be the case in the States. Transfer of bonuses from west to east? Is that the latest trend?

    “In finance people typically work 10-12 hours a day.”

    not the ones making +$,$$$,$$$ bonuses.

  • Posted by Michael

    “The savings glut argument was initially put forward to suggest that the United States’ external deficit was a natural response to a rise in savings in the emerging world.”

    No it wasn’t. It was first put forth by Bernanke as the explanation for Greenspan”s “condundrum” (in spite of central bank interest rate hikes, market interest rates remained extremely low). It was soon used to explain just about anything and everything, including why the U.S. had persistent (and rising) trade deficits in spite of much-hyped productivity increases, technical and financial innovation, etc, etc.

  • Posted by Too Much Fed

    Is the “savings glut” nothing more than wealth/income inequality on a global scale?

    The rich central bankers and their friends don’t want to DIRECTLY invest in the high wage countries because it might help the lower and middle classes there by lowering prices and/or raising wages (help make real hourly earnings growth positive or at less negative).

    From:

    http://www.theatlantic.com/doc/200801/fallows-chinese-dollars/3

    The voyage of a dollar

    “Let’s say you buy an Oral-B electric toothbrush for $30 at a CVS in the United States. I choose this example because I’ve seen a factory in China that probably made the toothbrush. Most of that $30 stays in America, with CVS, the distributors, and Oral-B itself. Eventually $3 or so—an average percentage for small consumer goods—makes its way back to southern China.
    When the factory originally placed its bid for Oral-B’s business, it stated the price in dollars: X million toothbrushes for Y dollars each. But the Chinese manufacturer can’t use the dollars directly. It needs RMB—to pay the workers their 1,200-RMB ($160) monthly salary, to buy supplies from other factories in China, to pay its taxes. So it takes the dollars to the local commercial bank—let’s say the Shenzhen Development Bank. After showing receipts or waybills to prove that it earned the dollars in genuine trade, not as speculative inflow, the factory trades them for RMB.

    This is where the first controls kick in. In other major countries, the counterparts to the Shenzhen Development Bank can decide for themselves what to do with the dollars they take in. Trade them for euros or yen on the foreign-exchange market? Invest them directly in America? Issue dollar loans? Whatever they think will bring the highest return. But under China’s “surrender requirements,” Chinese banks can’t do those things. They must treat the dollars, in effect, as contraband, and turn most or all of them (instructions vary from time to time) over to China’s equivalent of the Federal Reserve Bank, the People’s Bank of China, for RMB at whatever is the official rate of exchange.

    With thousands of transactions per day, the dollars pile up like crazy at the PBOC. More precisely, by more than a billion dollars per day. They pile up even faster than the trade surplus with America would indicate, because customers in many other countries settle their accounts in dollars, too.”

  • Posted by Too Much Fed

    con’t:

    “The PBOC must do something with that money, and current Chinese doctrine allows it only one option: to give the dollars to another arm of the central government, the State Administration for Foreign Exchange. It is then SAFE’s job to figure out where to park the dollars for the best return: so much in U.S. stocks, so much shifted to euros, and the great majority left in the boring safety of U.S. Treasury notes.

    And thus our dollar comes back home. Spent at CVS, passed to Oral-B, paid to the factory in southern China, traded for RMB at the Shenzhen bank, “surrendered” to the PBOC, passed to SAFE for investment, and then bid at auction for Treasury notes, it is ready to be reinjected into the U.S. money supply and spent again—ideally on Chinese-made goods.

    At no point did an ordinary Chinese person decide to send so much money to America. In fact, at no point was most of this money at his or her disposal at all. These are in effect enforced savings, which are the result of the two huge and fundamental choices made by the central government.

    One is to dictate the RMB’s value relative to other currencies, rather than allow it to be set by forces of supply and demand, as are the values of the dollar, euro, pound, etc. The obvious reason for doing this is to keep Chinese-made products cheap, so Chinese factories will stay busy. This is what Americans have in mind when they complain that the Chinese government is rigging the world currency markets. And there are numerous less obvious reasons. The very act of managing a currency’s value may be a more important distorting factor than the exact rate at which it is set. As for the rate—the subject of much U.S. lecturing—given the huge difference in living standards between China and the United States, even a big rise in the RMB’s value would leave China with a price advantage over manufacturers elsewhere. (If the RMB doubled against the dollar, a factory worker might go from earning $160 per month to $320—not enough to send many jobs back to America, though enough to hurt China’s export economy.) Once a government decides to thwart the market-driven exchange rate of its currency, it must control countless other aspects of its financial system, through instruments like surrender requirements and the equally ominous-sounding “sterilization bonds” (a way of keeping foreign-currency swaps from creating inflation, as they otherwise could).”

  • Posted by Too Much Fed

    con’t:

    “These and similar tools are the way China’s government imposes an unbelievably high savings rate on its people. The result, while very complicated, is to keep the buying power earned through China’s exports out of the hands of Chinese consumers as a whole. Individual Chinese people have certainly gotten their hands on a lot of buying power, notably the billionaire entrepreneurs who have attracted the world’s attention (see “Mr. Zhang Builds His Dream Town,” March 2007). But when it comes to amassing international reserves, what matters is that China as a whole spends so little of what it earns, even as some Chinese people spend a lot.

    The other major decision is not to use more money to address China’s needs directly—by building schools and agricultural research labs, cleaning up toxic waste, what have you. Both decisions stem from the central government’s vision of what is necessary to keep China on its unprecedented path of growth. The government doesn’t want to let the market set the value of the RMB, because it thinks that would disrupt the constant growth and the course it has carefully and expensively set for the factory-export economy. In the short run, it worries that the RMB’s value against the dollar and the euro would soar, pricing some factories in “expensive” places such as Shanghai out of business. In the long run, it views an unstable currency as a nuisance in itself, since currency fluctuation makes everything about business with the outside world more complicated. Companies have a harder time predicting overseas revenues, negotiating contracts, luring foreign investors, or predicting the costs of fuel, component parts, and other imported goods.

    And the government doesn’t want to increase domestic spending dramatically, because it fears that improving average living conditions could paradoxically intensify the rich-poor tensions that are China’s major social problem. The country is already covered with bulldozers, wrecking balls, and construction cranes, all to keep the manufacturing machine steaming ahead. Trying to build anything more at the moment—sewage-treatment plants, for a start, which would mean a better life for its own people, or smokestack scrubbers and related “clean” technology, which would start to address the world pollution for which China is increasingly held responsible—would likely just drive prices up, intensifying inflation and thus reducing the already minimal purchasing power of most workers. Food prices have been rising so fast that they have led to riots. In November, a large Carre­four grocery in Chong­qing offered a limited-time sale of vegetable oil, at 20 percent (11 RMB, or $1.48) off the normal price per bottle. Three people were killed and 31 injured in a stampede toward the shelves.

    This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.”

  • Posted by Too Much Fed

    Best paragraphs:

    “At no point did an ordinary Chinese person decide to send so much money to America. In fact, at no point was most of this money at his or her disposal at all. These are in effect enforced savings, which are the result of the two huge and fundamental choices made by the central government.”

    And probably in “collusion” with the U.S. fed.

    “These and similar tools are the way China’s government imposes an unbelievably high savings rate on its people. The result, while very complicated, is to keep the buying power earned through China’s exports out of the hands of Chinese consumers as a whole. Individual Chinese people have certainly gotten their hands on a lot of buying power, notably the billionaire entrepreneurs who have attracted the world’s attention (see “Mr. Zhang Builds His Dream Town,” March 2007). But when it comes to amassing international reserves, what matters is that China as a whole spends so little of what it earns, even as some Chinese people spend a lot.”

  • Posted by Too Much Fed

    “That is unfortunate. It is quite possible to believe that the buildup of vulnerabilities that led to the current crisis was a product both of a rise in savings in key emerging markets, a rise that — with more than a bit of help from emerging market governments — produced an unnatural uphill flow of capital from the emerging world to the advanced economies, and policy failures in the U.S. and Europe.”

    Are you sure there were policy failures? It seems to me the policy is debt enslavement of the lower and middle class in the high wage countries and then bring down the standard of living for the lower and middle class in those same high wage countries to the emerging market level while making sure the few benefit GREATLY.

  • Posted by Too Much Fed

    WStroupe said: “I think the emerging economies’ “savings glut” is working with other factors to actually help these economies begin to accomplish decoupling.”

    Bingo! This is what the chinese are up to. They want to start selling to Latin America and Africa their consumer goods and using their resources/commodities. When they accomplish that, they are just waiting to dump the USA, Europe, and Japan into third world status.

  • Posted by WStroupe

    Too Much Fed said (hey, that’s poetic!): “Bingo! This is what the chinese are up to. They want to start selling to Latin America and Africa their consumer goods and using their resources/commodities. When they accomplish that, they are just waiting to dump the USA, Europe, and Japan into third world status.”

    To some, or perhaps to many, here on this blog, that may sound like a ‘conspiracy theory’ borne of an over-active mind. But just consider all the relevant facts for a moment – whether it was all planned out in detail beforehand (I seriously doubt it) or whether it has fairly recently began occurring to the opportunistic minds in the emerging world, the saving’s glut in the emerging world, along with the emergence of this crisis since late July 2007, are in fact handing the emerging world a potentially terrific opportunity to shepherd the ongoing transition of the global order in such a way as to achieve precisely what Too Much Fed alludes to, as I quoted him above in this reply.

    Chess is a great game. Those most opportunistic (capitalizing quickly upon the misfortunes of the opponent) and those with the greatest ability to think strategically usually come off the winners. I think China and the other emerging markets are both opportunistic and more strategic in their thinking than we tend to give them credit for, and are better at these kinds of things than we (in the West) tend to be, in the post-Reagan era.

  • Posted by WStroupe

    Let me qualify my meaning in my last post a bit – I do not believe the core motives of China and the bulk of the emerging world are to trounce the U.S. and Europe into a 3rd-world status. Rather, I think their motives are to spring-board themselves into a position of global ascendancy, in effect, using the multi-dimensional gains achieved from their Bretton Woods II ties with the West as the springboard. I think they’d prefer to see the U.S. and Europe survive this crisis mostly intact, but not retain their position of global dominance. That’s certainly not the same as wishing and intending that the U.S. and Europe get relegated to 3rd-world status.

    Having said that, however, it must also be said that China and the rest of the emerging world is not the keeper of the U.S. and Europe as respects their traditional position of global dominance, nor even of their economic, financial, political and social fortunes. Only to the extent that potential Western crises in such spheres impact the emerging world too negatively will they (the emerging world) step up with any rescue, whether partial or perhaps more full. Put another way, the emerging world will let the West suffer to the fullest extent possible the repercussions of its own foolishness and arrogance. Again, that’s quite different than actually scheming and conniving to turn the West into a 3rd-world-like failure, something that would be extremely unlikely by outside hands. Hell, we’re seriously risking doing it to ourselves by plunging headlong into oceans and oceans of new red ink. We’re the anti-savings glut. The very belated decision to save on the part of the American citizen comes far too late in the game.

  • Posted by bsetser

    too much fed.

    i liked fallows piece — in part b.c. i was one of his sources ….

    but there is still little need to paste in long excepts. glory’s style (third comment) is worth emulating

  • Posted by Rien Huizer

    Thomas,

    “Singapore is possibly the most extreme case of a “savings glut” country: The savings rate is extremely high, but the investment rate has dropped to “Western” levels. As a consequence, the current account surplus has recently increased to nearly 30 % of GDP.

    If that’s where China is headed in the longer run (savings stay high, but investments drop), then the world will be facing one hell of a savings glut…”

    Highly unlikely China is going there. Singapore’s GDP (similar to places like Luxemburg and Switzerland) is quite unusual, in the sense that it has a very large profit component in GNI that is likely attributable to the presence of MNCs (and others..) who do reinvoicing there, various forms of financial services and investment. It also has quite a few very high net worth residents whose wealth is virtually unrelated to the local economy. All of this due to favorable institutional features and highly specific location factors. Many of those companies do not have to invest in plant and equipment (take for instance farmaceuticals), hence a growing current account bias. Very different from China.

  • Posted by AllanGreen

    Without assigning responsibility – let’s be clear about something. Econ 101.

    The savings glut is a China problem, and took place because China is not a market economy, and lacks the mechanisms required to facilitate internal consumption – read internal investment.

    Since China games the international markets, via currency manipulation, and violates WTO obligations on capital accounts, it is hardly surprising that its intervention in the global markets, is one gigantic distortion. Nor is it surprising, that it remains a non-market economy, given all the incentives to game the system!

    It makes Wal-Mart a big prophet – but its one big transfer pricing scheme!

  • Posted by charles monneron

    “That to me is the “savings glut”; tis entirely an EM thing, with the offsetting move that balanced the global economy coming in no small part from a fall in US national savings. Determining casuality is hard — though i would agree with Bernanke, Wolf and Summers that low real rates offer a hint.”

    causality, casualty ? nice freudian slip !

  • Posted by Viktor

    What I don’t understand is: why are people like Paul “free lunch” Krugman blaming the emerging world for their propensity to save?

    It was the US banks who funneled the money into fraudulent “investments” promising irrealistic returns. The basic mistake was that people naively believed that the US banks are _not_ going to rob them blind and rip them off outrageously, which in fact they did.

    These people seem to accept that if you get cheap funding, sink it into some black hole that is predicated on house prices always going up, and then blow up, then it’s not your fault, but that of whoever gave you the money.

    This is a completely inverted morality, and if we accept this to be the real causal chain, then I think it’s better if we all withdraw our money from the banks…

  • Posted by Qingdao

    Here is Skidelsky in a review of Martin Wolf’s book ref. the 97 Asian crisis:
    Under these conditions of uncertainty, Koreans and other foreigners started selling the domestic currency, which therefore plummeted in value and triggered a currency crisis. This is when the full financial crisis of the 1990s really got going. With a devalued domestic currency, neither private nor public institutions could afford to take out new loans in foreign currencies, and the old ones could not be repaid. Interest rates soared and insolvent companies were wiped out, bringing solvent banks down with them. “Domestic credit seizes up. Inflation surges as the currency tumbles. The economy falls into a deep recession.” Partly because of similarity of circumstances and partly because of contagion effects, this was the fate of most East Asian economies in 1997–1998.
    Here is Zhou Xiaochuan from a recent post at PB of China:

    The high savings ratio and large foreign reserves in the East Asian countries are a result of defensive reactions against predatory speculation. During the Asian Financial Crisis, the rampant speculations of hedge funds caused large capital inflows and subsequent reversal in these countries, which exacerbated their economic woes. People in these countries were shocked, and disgusted by these speculative attacks. Afterwards, many suggested that unregulated predatory speculation caused the crisis, and appropriate international regulation was needed. However, for various considerations, some countries were against such regulations, and failed to see the need to adjust the regulatory frameworks. International organizations also failed to perform their regulatory responsibilities over abnormal capital flows, forcing the East Asian countries to amass foreign reserves to fend for themselves.

  • Posted by Thomas

    @Rien Huizer

    All you write is true. But does that really imply that things are so different from China?

    Let’s see:

    Singapore has a large SoE-sector. It has lots of MNCs that have invested money into manufacturing (the “reinvoicing” sounds similar to what some – including Twofish on this blog – have said happens in China on a massive scale due to tax advantages and possibly other reasons). It has two huge sovereign investment funds (Temasek and GIC) which control a major portion of Singapore’s international investments, with the stated aim of developing “Singapore’s second wing abroad” via massive direct investments. And it has an entirely funded mandatory pension scheme (CPF) that essentially forces private households to save a large portion of their income (which then to a large extent gets channelled into the aforementioned sovereign funds). As for the high-net-worth individuals: Sure, China doesn’t attract many of those from abroad, but it has lots of homegrown ones by now.

  • Posted by Brick

    I would query the fact that the IMF data does not show price declines in China, which would seem logical conclusion since factory gate prices have declined. It is also interesting to note that the IMF had some difficulty calculating savings (see their note below) and seems to use a different method to the US calculations. Correct me if I am wrong (I only perused the data quickly) but the savings forecast data does not show increases in the future, not even for the US. I wonder if there is some sort of difference in definition of savings and whether paying off debt does not count as savings in the IMF’s eyes.

  • Posted by Thomas

    @Rien Huizer

    regarding the “profit component of GNI”:

    I checked the latest data, and in 2008, roughly half of Singapore’s GNI was “employee compensation”, and the other half “gross operating surplus” (what you apparently call “profit component).

    Isn’t that quite similar to China as far as the percentages are concerned?

  • Posted by Michael Pettis

    Interestingly enough, Brad, Zhou Xiaochuan recently posted this on the PBoC website: “The high savings ratio and large foreign reserves in the East Asian countries are a result of defensive reactions against predatory speculation. During the Asian Financial Crisis, the rampant speculations of hedge funds caused large capital inflows and subsequent reversal in these countries, which exacerbated their economic woes. People in these countries were shocked, and disgusted by these speculative attacks. Afterwards, many suggested that unregulated predatory speculation caused the crisis, and appropriate international regulation was needed. However, for various considerations, some countries were against such regulations, and failed to see the need to adjust the regulatory frameworks. International organizations also failed to perform their regulatory responsibilities over abnormal capital flows, forcing the East Asian countries to amass foreign reserves to fend for themselves.”

    In the past it was always argued by chinese policymakers that high PBoC reserve accumulation was simply an unintended consequence of profligate US consumption, and was not domestic-policy driven. But now by arguing that polices aimed at protecting China from Asia-1997-style balance-of-payments crises were what drove the reserve accumulation priocess (a reasonable if partly muddled decision, it seems to me, that got out hand in part because of loose monetary policies in both China and the US) he is implicitly acknowledging the role of domestic policy in driving the imbalance. Like with his SDR proposal, I think Governor Zhou has sort of allowed the savings glut hypothesis to slip in by the back door, but of course he would get into serious trouble if he ever acknowledged this explictly.

  • Posted by bsetser

    Qingdao — China has WAY more reserves than it needs to avoid a repeat of the Asian crisis. Way more. In addition to building up its reserves, it also restricted borrowing and maintained capital controls — which reduced its need for reserves. The net result was that China traded vulnerability to an asian style crisis to vulnerability to a collapse in external demand, as it created incentives to concentrate too heavily in exports.

    Tis hard to attribute the rise in Chinese savings v investment from 04 simply to a policy response to Asia’s crisis; if Asia was the driver, why did china wait so long to run up its current account surplus?

    Empirically, the surplus emerged after the USD depreciated bringing the RMB down, and then after China curbed bank lending to try to keep the Chinese economy from overheating in 04. If china had allowed theRMB to rise then to cool its economy, in my view there wouldn’t have been the same kind of surge in savings v investment in china — and today China wouldn’t have to worry so much about its excessive exposure to the dollar.

  • Posted by bsetser

    Michael — perhaps. i wouldn’t have recognized this as a backhanded recognition that the rise in savings was policy driven if you hadn’t highlighted it.

    Though I am more struck my the cosmic irony of a world where China builds up its reserves to defend against unregulated “speculators” (presumably a reference to hedge funds, among others) and then ends up investing some of its reserves with said unregulated speculators …

    The other irony is that savings didn’t really rise in the countries most hit by the crisis of 97/98; in most such countries, surpluses reflect a fall in investment. the big rises in Asian savings came in India — where the rise financed a higher level of investment and growth and didn’t create an imbalance — and in China …

  • Posted by Rien Huizer

    Thomas,

    Any Singapore/China comparison is complicated. Your facts in both comments are correct. But you know that just counting limbs and reproductive habits is not going to convince anyone taht what happens to mice must happen to elephants. Germany cannot emulate strategies (i guess they have them there too, it is a very small place) available to luxemburg. Singapore -sorry, Spore is my hobby- is chamber music.

    And while Singapore and few other boutique economies, with a very clever version of economic nationalism, can get away with these figures, large countries like China cannot. Singapore can free ride many world wide institutions (i.e. not contribute to the cost). China’s <50% can only be explained as a sign of a highly unjust division of China’s national income. No Singaporean (if these statistics would be politically problematic in Singapore, they would not be this easily available) will blame the government for letting a pharmaceutical giant drop a few billion of group profit in Spore (and there is genuine life science activity to provide substance of course) So Singapore’s BOP surplus is something that does not disrupt the international economy. And it may even grow bigger. Spore’s domestic economy is in about the same shape as HK and Taiwan. Struggling. It would be crazy for Spore to have a freely floating currency (same for HK for that matter) because so many significant enterprises do not even account in it. Of course they pay salaries and rent in SGD, but that is it.

    That important parts of Spore’s political economy have Chinese characteristics (a bit of KMT ideology mixed with Harvard Public Administration and learning by doing) with a large (and maybe surprisingly effidcient state sector) does not mean that a very large country, with very strong industry potential, on the threshold of middle income status, deserves the same trade political treatment that a harmless resort for international capital gets. No way.

    Interesting topic though, but ugly.

  • Posted by Winslow R.

    I hope you eventually understand global rebalancing will require a better balance between U.S. fiscal and U.S. monetary policy.

    Only once China is sufficiently concerned with the inflationary consequences of U.S. fiscal policy will they make the political changes necessary to slow or stop U.S. Treasury Security purchases.

  • Posted by Thomas

    Quote Rien Huizer: “And while Singapore and few other boutique economies, with a very clever version of economic nationalism, can get away with these figures, large countries like China cannot.”

    I agree with that statement. What I meant to say earlier was: China might try to follow Singapore’s course (either on purpose, or unwittingly). But it can’t, because it’s too big. But if it indeed tries to go down that route, the implications will be nasty.

    Because Singapore is tiny and ultimately inconsequential (though a 30 % current account surplus in Singapore is the same absolute size as a 1.5 % current account surplus in Germany, i.e. not minuscule in absolute standards). China isn’t, and can’t possibly do the same thing for long.

  • Posted by Thomas

    Quote Rien Huizer: “sorry, Spore is my hobby”

    Seems we have the same hobby… ;-)

  • Posted by Blissex

    NOBODY has mentioned the Japanese ZIP which begun in 1995-1996

    Far from irrelevant.

    Also the credit explosion in the USA (near abolition of capital requirements) which also begun in 1995-1996.

  • Posted by pebird

    Why the focus on excess savings instead of scarcity?
    Which tail is wagging which dog here?

    Didn’t the export of manufacturing to the Far East basically guarantee a savings glut/scarcity imbalance?

    The entire global glut and credit expansion looks like a generational scheme to repatriate profits while bypassing virtually all workers and avoid taxation.

    What did anyone expect – eliminate large volume of decent income jobs in the US – replace 75% of lost income with cheap goods. No middle class wage pressures in US – check. Inflation at “3%” even though imported consumer goods are roughly 15-25% cheaper. Hmmm – can’t be the volatile energy and food, that’s always excluded.

    Pump up trade volume because incremental unit margin decreases. Over production of retail, electronics, toys, apparel, automobiles, hedge fund managers. WalMart becomes largest US private employer – someone in HR forgets about health insurance.

    China gets to invest in Soviet-scale infrastructure projects, with better architects. Workers gets taste of Western lifestyle – after 15 years back to the farm – sorry no work. Specialize in producing things not designed nor needed in China. Basically global wage arbitrage game.

    Pile up of dollars in Chinese central banks – big f*ing surprise. What to do? Lets call it something that sounds really bad – like a glutton eating all those dollars disappearing from US worker paychecks. What a waste of the last quarter century. At least the east coast of China looks like Las Vegas.

  • Posted by Too Much Fed

    bsetser: Sorry about that.

  • Posted by Simon

    Greenspan lowered interest rates to avert a downturn AND try to maintain high employment in the US. It worked. Unfortunately the buckets of money made available didn’t find useful effect, instead they sparked a bubble in housing. Inflation was kept low, because of the high productivity, IN CHINA. Unfortunately high productivity in China does not help the US.

    If there had been a significant and sustained downturn in the US from 2001 onwards it would have forced household savings rates UP, forced capital allocation into areas of TRUE internationally competitive PRODUCTIVITY, slowed China’s growth rate and potentially improved capital allocation in that country too.

    In interesting corollary to the current discussion about regulation implied by this analysis is that more than likely improved regulation is not the full answer. Curbed credit expansion and closer supervision of credit agencies while important are probably not a complete solution. Ironically higher interest rates may well be. More than likely all this fuss could be avoided if it was not permisable for the FED to lower interest rates to below lets say 4%.

    If no one can come up with a sensible plan to allocate capital effectively and pay interest at 4% its probably not worth while doing it.

    I question the assertion that increased savings rates result in lower interest rates. Is the short end of the curve controlled by central banks or not?

  • Posted by Laobaixing

    Simon,

    A bit late, but excellent post. Just the idea of having an interest rate bottom. But wait until the next boom. But I agree that the 2001 downturn should have been allowed to run its course, however painful for the politcos of the day. That would have saved the world a lot of trouble.

    Perhaps that is why the Chinese are very publicly looking for alternatives to a reserve currency managed by a (possibly irresponsible) national government interested only in its domestic electability. Every modern bank regulation theorist is familiar with the “gambling for survival phenomenon” that usually impoverishes outsiders. Looks that is exactly what the GWB gvt did and no doubt the present gvt will do if the circumstances rquire.

    But that is also the main reason why no US gvt would sit by and let “the world” take away its main tool of domestic economic policy. I am sure the Chinese are aware of this and what they may want is something far less ambitious (yet costly for the US). It would be interesting to know what that might be. It cannnot be anssurance of policy quality because that would not be a credible promise (no democratic gvt can restrict successors economic policy or ability to change laws, except by constitutional change). Perhaps some form of guarantee. Leveraging the IMF as seems to be in the process now has limits and is in essence a crazy idea. Perhaps a new type of SDR, with the CNY in it and some liberation of China’s capital account.

  • Posted by Jonathan Sherman

    Interesting that the chart of Chinese saving as a % of Chinese GDP mirrors the price of spot gold over the past 20 years.

  • Posted by henrylow

    Everyone has their favorite way of using the internet. Many of us search to find what we want, click in to a specific website, read what’s available and click out. That’s not necessarily a bad thing because it’s efficient. We learn to tune out things we don’t need and go straight for what’s essential.

    latest trend

  • Posted by Pension Savings Accounts

    I appreciate the concern which is been rose. The things need to be
    sorted out because it is about the individual but it can be with
    everyone.
    Pension Savings Accounts

  • Posted by cristina

    hiiiiiiiii

    I think that’s not necessarily a bad thing because it’s efficient. We learn to tune out things we don’t need and go straight for what’s essential.

  • Posted by cristina

    hiiiiiii

    I think that thing because it’s efficient. We learn to tune out things we don’t need and go straight for what’s essential.
    ………..
    cristina

  • Posted by ISA Allowance

    Thanks for the great article. These are wonderful examples of techniques and strategies that our organization plans to use to deliver a quality social experience to our volunteers.

    Cynthia
    —————–
    ISA Allowance

  • Posted by avelino lobo

    Hi alll,
    It would be interesting to know what that might be.
    ========================
    avelino
    Compare ISAs

Pingbacks