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Thursday, July 20, 2006

The Savings Glut

Was there and is there still a savings glut? Ben Bernanke thinks so. This is from David Altig at macroblog:

macroblog: The Chairman Speaks: The Savings Glut Persists: More from Chairman Bernanke's exchange with Senator Bennett during yesterday's testimony:

BENNETT: Do you still believe there's a global savings glut and that we can expect people to continue to want to put their money here?

BERNANKE: I think there still is a global savings glut. It may have moderated somewhat because of increased growth in some of our trading partners. But on the other hand, there's also been, of course, these large revenues that the oil producers are accumulating because of the high price of oil. They are not able to absorb - - use those revenues at home very quickly. So they are taking that money and putting it back into the global financial system. And so that's contributing to this overall global savings glut...

So I think there has been some change, but the broad idea that the global savings glut is out there I think is still valid.

Of what Mr. Bernanke speaks, in pictures:

Middle_east

Ni_asia

Developing_asia

Still looking pretty gluttish.  The data, if you are interested:

Download savings_glut.ppt

UPDATE: Shame on me.  I should have added this part of the discussion:

BENNETT: So you're suggesting that foreign investment in the United States is not about to dry up at any point soon?

BERNANKE: I don't think it's going to dry up. I do think that over a period of time we should become more reliant on our own saving and reduce the current account deficit.

Emphasis added.

Like the word bubble, glut has a new meaning. To me, the term glut conveys a disequilibrium condition -- a time when aggregate demand is deficient, there is involuntary unemployment, goods are piling up on store shelves (that's the glut, lots of goods, nobody to buy them), and for some reason prices aren't moving to clear the market (e.g. the Malthus-Say debate where Malthus said, essentially, that gluts are caused by high profits leading to excessive capital accumulation and a mismatch between saving and investment; Say responded by saying that gluts were impossible because supply creates its own demand, i.e. with Say's law).

So every time I hear savings glut I have to remind myself of how the term is being used. I don't think Bernanke means that the supply of savings exceeds the demand for savings at the current interest rate even though I'm certain he is well aware of this interpretation of a glut. He means increases in supply are holding interest rates down as they move to clear the market. Thus, a glut simply means a large supply driving down equilibrium prices, not a disequilibrium condition where supply exceeds demand.

    Posted by on Thursday, July 20, 2006 at 07:14 PM in Economics, Monetary Policy, Saving | Permalink  TrackBack (0)  Comments (14)

          

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