The Economist begins a series of articles on the global saving glut, global investment deficit, excess liquidity, and slow expected world growth hypotheses for the persistence of low long-term interest rates, with an emphasis on world saving patterns. This introductory piece asks whether Ben Bernanke, who can be assigned responsibility for both monetary and fiscal policy, was correct to deflect criticism over the current account deficit away from U.S. policymakers. It concludes that the U.S. must shoulder more responsibility for global imbalances than Bernanke's global saving glut hypothesis allows. The paper also concludes that rebalancing will take time and invlolve risks to the world economy. The second figure showing the shift in saving from the household to the business sector in recent years is noteworthy, though the chart shows this is not the first time household saving has dropped and corporate saving has risen since 1980:
The great thrift shift, by Zanny Minton Beddoes, The Economist: On March 10th 2005, Ben Bernanke ... argued ... the world might be suffering from a “global saving glut”. The phrase immediately caught on. ... The idea's appeal lies in the way it ties together two of the most vexing questions about today's economic landscape: why are interest rates so low? And why can America borrow eye-popping amounts from foreigners with seeming impunity? ... A “global saving glut” could explain both oddities. ... His suggestion that the causes of global imbalances lie elsewhere conveniently deflects attention from monetary and fiscal decisions ... It suggests that Mr Greenspan's loose monetary policy and George Bush's tax cuts are not responsible for the imbalances in the world economy. That may seem a little self-serving, coming from a man who has subsequently moved from the Federal Reserve to become chairman of Mr Bush's Council of Economic Advisers.
Taken at face value, the notion of a global saving glut is not borne out by the facts. “Glut” suggests an unusually large amount, as in a summer glut of strawberries. In fact, figures published in the IMF's latest World Economic Outlook show that the rate of global saving as a proportion of global output, measured at market exchange rates, has mostly been heading downhill over the past 30 years, with a particularly steep plunge between 2000 and 2002 (see chart 1)...
But Mr Bernanke's argument is more subtle. He is saying that low interest rates imply too much saving relative to the amount people want to invest, and that the ... discrepancy is concentrated outside America. ... [E]ven with the saving rate falling, there could be a glut of thrift if ... the demand for investment ... was falling even faster. The important factors in the equation, therefore, are shifts in the appetite for investment as well as in the geography of thrift. On both counts the world has seen big changes. Traditionally, most of the saving ... is done by households, whereas most of the investing tends to be done by firms. But in the past few years firms have become net savers as their profits have exceeded their investments. That change has been most pronounced and long-lasting in Japan, where corporate saving soared after the bubble economy collapsed in the early 1990s. Burdened with bad debts ..., Japanese firms have been net savers for a decade. The late 1990s saw a similar shift in many emerging Asian economies, where corporate investment plunged after the Asian financial crisis. After the stockmarket bubble burst in 2000, American and European firms' investment also fell. Although American firms began investing again a couple of years ago, the level of corporate investment is still relatively low, given how strongly the economy—and profits—have been growing. Firms in industrial countries as a whole are still saving more than they invest, despite record profits (see chart 2). The only significant country bucking the trend is China, where investment has been rising sharply. But saving has been growing faster still.
A weak appetite for investment might help explain low interest rates, but not the rising imbalances between America and the rest of the world. To understand those, two other factors have to be considered: differences in countries' economic structures, and differences in policymakers' reactions to the investment bust.
America is at one extreme. ... Between 2001 and 2003, America enjoyed its biggest fiscal stimulus of the post-war period, and short-term interest rates were slashed. Declining interest rates fuelled a boom in house prices, encouraging people to borrow against their properties. Economic growth remained strong and the current-account deficit soared. ... To protect exports and to build up vast war chests of reserves, many East Asian governments kept their currencies cheap for years after the financial crises. Firms stayed reluctant to invest, the saving surpluses remained large and the foreign-exchange reserves piled up. Japan and Europe lie between those two extremes. ... In short, a good part of the rising imbalances of the past few years can be explained by a series of investment busts—after periods of overinvestment—and sharp differences in the way policymakers responded to them. But particularly since 2000, two other factors have also become important: more saving in China, and the soaring price of oil.
China's investment rate, at 46% of GDP, is the world's highest by far ... but its saving rate has been rising even faster. ... The country has kept its currency cheap and exported ever more capital to the rest of the world. At the same time, high oil prices have brought a financial windfall to the world's oil exporters which so far they seem to have chosen to save rather than spend. As a group, the oil-exporting countries are now the biggest counterparts to America's current-account deficit (see chart 3).
These shifts have ... had important and unusual consequences. The first is that capital now flows primarily from poor countries to rich countries. ... The second consequence is that outside China, less saving by households rather than investment by firms has become the engine of global economic growth. ... consumers, particularly American ones, are content to become ever more indebted. That willingness appears closely related to the rapid rise in house prices across much of the globe. These patterns are a long way from historical norms. Can they last? In the long term, the answer is clearly no. Household saving cannot keep on falling, and America's foreign borrowing cannot keep on rising. The question is when and how the tide might turn.
One camp argues that the saving glut Mr Bernanke has identified is a temporary and largely cyclical phenomenon. ... But a growing group of analysts now suggests that the “saving glut” is the result of long-term structural shifts and is likely to last for years, perhaps decades. ... If the “saving glut” really is here to stay, there are two main possibilities. The first is that America's consumers will continue to barrel along and the imbalances between America and the rest of the world will increase further. The second is that Americans themselves will start saving again, perhaps because the housing market falters ... With the rest of the world still determined to save too, that would send the global economy into a tailspin. This survey will try to determine whether the shifts that have caused the “saving glut” are likely to be temporary or more long-lasting. It will conclude that the recent shifts in global saving and investment patterns are not permanent, but nor are they likely to be reversed overnight. ... Nudging global saving and investment patterns into a healthier balance will require new thinking, both inside and outside America. Policymakers bear more responsibility for the thrift shifts, and the global imbalances, than Mr Bernanke cares to admit.
More to follow...
Posted by Mark Thoma on Friday, September 23, 2005 at 01:23 AM in Budget Deficit, China, Economics, International Finance, International Trade, Monetary Policy, Policy |