Savings Glut or Investment Drought?

Brad Setser says case closed:

Case closed: A savings glut, not an investment drought, by Brad Setser: The data at the back of the IMF’s latest WEO (table A16) indicates 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 investment 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.” ... 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 ... 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... 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 born 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. ...

Comments

[Bernardo]

We will see, I don't think people will have much more money to save if food prices continue to rise at today's pace. This is especially true for emerging countries where the food-to-income ration is higher than in developed countries.

[robertdfeinman]

I seem to remember when the USSR had a savings "glut" with workers having large accounts in state banks (there was nothing to buy).

But as soon as Russia entered the world market the ruble became devalued and the savings amounted to nothing in terms of purchasing power. I wonder how similar the situation in China will be if either the currency is allowed to float, or the looming resource shortages cause runaway inflation.

I keep asking what "savings" is.

[john c. halasz]

rdf:

The Russians et alia didn't have an excess of savings that "disappeared" into the world market. They had "shock therapy" imposed upon them, after which a massive looting and export of formerly collective capital occurred.

[Alphabet Soup]

"I suspect the emerging world’s savings glut largely reflects a glut in government (and SOE) savings."

Interesting. Islamic nations will not buy debt, only equity. Other SOE and SWF have lost confidence in private sector loans, so non debt assets in general may become more popular (as negative real short interest rates drive foreign savers to desperate measures).

No domestic savings are needed, and very low real long rates reflect this. However, a negative savings rate leaves domestic citizens with inadequate rainy day, and retirement funds. A conundrum indeed.

[pgl]

Brad in the comment section said this was the same thing as the Bernanke global savings glut. Using the data in the same table 16, I argue otherwise over at EconoSpeak.

[eightnine2718281828mu5]

So...

If we have CEO's saying "Screw American labor; we can get it much cheaper from Asia", shouldn't we return the favor? ie...

"Screw the rich and their savings; let's just raise their taxes. We can get savings much cheaper from Asia."

[S N]

This is not savings glut. This is due to exchange rate manupulation.

All emerging goverments central banks print money to buy forex (dollar, euro, pound and etc). That is why all emerging economies have higher inflation rate.

The emerging economies are overheating beyond the control. When US economy slows down, all export oriented emerging economies will go tail-spin. But their over heating economies will take time to cool off. In few years before their economies cools to a level acceptable, these emerging economies will spend thier good amount of forex savings on commodities.

[Real Person from the Real World]

S N has some interesting comments, if I really understand them well. I would enjoy some expounding on this line.

[hari]

SN is off his rocker - if he seriously thinks currencies are manipulated in emerging markets. Don't shirk from US responsibility of messing up the global credit markets with its fruadulent subprime credit derivatives and SIVs, CDS and whatnots...

Get serious you with your *bumble bees* mentality!

[BJ Feng]

The lack of adequate investment options in the emerging world is responsible for the savings glut. Many Chinese are currently trapped into placing their savings in a very very low yielding savings account. They cannot buy foreign stocks and have already bid up their domestic stocks to a very high level. There is simply no way for them to invest, so they keep their money in savings accounts that can't even keep up with inflation. Governments have only a fraction of the wealth their citizens have. While governments are free to invest in exotic hedge funds, their citizens are left to their meager savings accounts, thus the glut.