Global saving glut
Encyclopedia
Global saving glut is a term coined by Ben Bernanke
in 2005. The term describes a situation in which there are worldwide too many savings with respect to investment
opportunities. On a national level a saving glut creates the tendency for savings to finance current account
deficits instead of investments. This can be observed, according to Bernanke (2005), in both developing and industrial countries. The most important receiving country of these export surpluses financed by excess savings, is the United States, which runs a current account deficit.
Other economists, such as John B. Taylor
, reject the claim that there was a global saving glut in the early 2000s, arguing that while there were global imbalances due to the US saving less, the world as a whole was saving less than in previous decades.
Niall Ferguson
in The Ascent of Money
, published in 2008, examines the long history of money, credit, and banking. In it he predicts a financial crisis as a result of the world economy and in particular the United States
using too much credit. Specifically he cites the China
–America
dynamic which he refers to as Chimerica
where an Asian "savings glut" helped create the subprime mortgage crisis
with an influx of easy money.
As a result the mature industrial economies seek to run current account surpluses and thus to lend abroad.
As Alan Greenspan
put it:
like the German economist Hans-Werner Sinn
, who claims, that it was the monetary policy of the US Federal Reserve in the 1990s which kept interest rates too low for too long. In addition, the policy of the US government encouraged private debt to promote private consumption. This led to a lack of savings in the US which was then provided from foreign countries on a basis which was not sustainable.
rejects the claim that there was a global saving glut in the early 2000s, writing:
He continues that while there were global imbalances – the US had a saving gap, while the rest of the world had a saving glut – these canceled out, and there was no net global saving glut:
However, the global gross savings rate (not necessarily the net savings rate) during the 2000s was slightly higher than savings rate in the 80s or 90s according to IMF data.
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
in 2005. The term describes a situation in which there are worldwide too many savings with respect to investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
opportunities. On a national level a saving glut creates the tendency for savings to finance current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
deficits instead of investments. This can be observed, according to Bernanke (2005), in both developing and industrial countries. The most important receiving country of these export surpluses financed by excess savings, is the United States, which runs a current account deficit.
Other economists, such as John B. Taylor
John B. Taylor
John Brian Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution....
, reject the claim that there was a global saving glut in the early 2000s, arguing that while there were global imbalances due to the US saving less, the world as a whole was saving less than in previous decades.
Niall Ferguson
Niall Ferguson
Niall Campbell Douglas Ferguson is a British historian. His specialty is financial and economic history, particularly hyperinflation and the bond markets, as well as the history of colonialism.....
in The Ascent of Money
The Ascent of Money
The Ascent of Money: A Financial History of the World is Harvard professor Niall Ferguson's tenth book, published in 2008, and an adapted television documentary for Channel 4 and PBS...
, published in 2008, examines the long history of money, credit, and banking. In it he predicts a financial crisis as a result of the world economy and in particular the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
using too much credit. Specifically he cites the China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
–America
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
dynamic which he refers to as Chimerica
Chimerica
Chimerica is a neologism coined by Niall Ferguson and Moritz Schularick describing the symbiotic relationship between China and the United States, with incidental reference to the legendary chimera....
where an Asian "savings glut" helped create the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
with an influx of easy money.
In advanced countries
- Aging populations: These populations must make provision for an impending increase in the number of retirees relative to the number of workers.
- “Dearth of domestic investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
opportunities”, due to- slowly growing or declining workforces,
- high capital-labor ratiosCapital intensityCapital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
, which leads to low returns on domestic investment.
As a result the mature industrial economies seek to run current account surpluses and thus to lend abroad.
Developing countries
- "War chests" of foreign reserves: To avoid the consequences of financial crises many developing countries are building up large quantities of foreign-exchange reserves. These foreign reserves can be used as a buffer against potential capital outflows during financial crises.
- Promoting export-led growth by preventing exchange-rate appreciation (sometimes called Bretton Woods IIBretton Woods IIThe 2008 G-20 Washington Summit on Financial Markets and the World Economy took place on November 14–15, 2008, in Washington, D.C., United States. It achieved general agreement amongst the G-20 on how to cooperate in key areas so as to strengthen economic growth, deal with the financial...
).
- Rise in oil prices: This leads to rising current account surpluses of oil exporting countries in the Middle East, in Russia, Nigeria, and Venezuela.
The US as importing country
According to Bernanke the US was attractive for foreign investors because of new technologies and rising productivity. Capital flowing into the United States increased the value of the dollar making the imports of the US cheap (in terms of dollars) and exports expensive (in terms of foreign currencies), creating a rising US current account deficit.Consequences of the saving glut
- Rising global imbalances with respect to international current account balances
- Developing countries becoming net lenders on capital markets, while industrialized countries such as the United States became net borrowers
- Low rates of interest: Desired saving tending to be larger than desired investment leads to a fall in the interest rateInterest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
. - Rising assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
prices, which result from low interest rates.
As Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
put it:
- Whether it was a glut of excess intended saving, or a shortfall of investment intentions, the result was the same: a fall in global real long-term interest rates and their associated capitalization rates. Asset prices, particularly house prices, in nearly two dozen countries accordingly moved dramatically higher. U.S. house price gains were high by historical standards but no more than average compared to other countries.
Critique
This view of a world wide saving glut responsible for low levels of interest rates is disputed by neoclassical economistsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
like the German economist Hans-Werner Sinn
Hans-Werner Sinn
Hans-Werner Sinn is a German economist and President of the Ifo Institute for Economic Research.- Education and career :...
, who claims, that it was the monetary policy of the US Federal Reserve in the 1990s which kept interest rates too low for too long. In addition, the policy of the US government encouraged private debt to promote private consumption. This led to a lack of savings in the US which was then provided from foreign countries on a basis which was not sustainable.
Rejection
Economist John B. TaylorJohn B. Taylor
John Brian Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution....
rejects the claim that there was a global saving glut in the early 2000s, writing:
- The main problem with this explanation is that there is no actual evidence of a global saving glut. On the contrary ... there seems to have been a saving shortage. ... [T]he global saving rate – world saving as a fraction of world GDP – was low in the 2002–4 period, especially when compared with the 1970s and 1980s.
He continues that while there were global imbalances – the US had a saving gap, while the rest of the world had a saving glut – these canceled out, and there was no net global saving glut:
- To be sure, there was a gap of saving over investment in the world outside the United States during 2002–4, which may be the source of the term saving glut. But the United States was saving less than it was investing during this period; it was running a current account deficit which implies that saving was less than investment. Thus the positive saving gap outside the United States was offset by an equal sized negative saving gap in the United States. No extra impact on world interest rates would be expected. As implied by simple global accounting, there is no global gap between saving and investment.
However, the global gross savings rate (not necessarily the net savings rate) during the 2000s was slightly higher than savings rate in the 80s or 90s according to IMF data.
External links
- Governor Ben S. Bernanke: The Global Saving Glut and the U.S. Current Account Deficit. March 10, 2005
- Chairman Ben S. Bernanke: Global Imbalances: Recent Developments and Prospects At the Bundesbank Lecture, Berlin, Germany. September 11, 2007.
- Thierry Bracke and Michael Fidora: Global liquidity glut or global savings glut? European Central Bank Working Paper Series No 911/June 2008
- Niall Ferguson and Moritz Schularick (2007) on "Chimerica"