from Follow the Money

Bernanke and the global savings glut

October 24, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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If you want a quip --

A John Roberts, not a Harriet Miers.  Actually, more of a moderate John Roberts than a John Roberts. Bernanke will have no trouble getting confirmed.  Bernanke's academic credentials are second to none.  

But I think Greg Anrig is right: Bernanke probably appeals more to the center and the center-left (see DeLong) than the supply-side right. 

Internationally, Bernanke is most famous for his global savings glut thesis.

Like Dan Gross, I think that thesis, as originally constructed, had some problems:

  1. In many parts of the world, current account surpluses rose because of a fall in investment, not a rise in savings.  China is a bit the exception.  No one can question the presence of a Chinese savings glut.
  2. It downplayed reserve accumulation just a bit too much for my taste.  After all, why did a surge in capital inflows to the US lead US rates to fall and US consumption to surge, lowering national savings, while a comparable surge in capital inflows have no such effect on Chinese savings?
  3. It is not clear why the Asian crisis of 97-98 explains the Chinese savings surge of 02-05, or why Chinaneeds to hold 50% rather than say 20% of its GDP in reserves.   Asia's crisis taught me that an emerging economy probably needs 10% of its GDP in reserves, not 5% or less, but China has had more reserves than it needs to avoid another "Asia" for some time.
  4. It downplays the US fiscal deficit a bit too much.  Cross country evidence suggests that fiscal deficits do contribute to larger current account deficits
  5. The argument that if the US cut its fiscal deficit, there would be basically zero impact on the US current account deficit since there would still be more savings than investment abroad, and that excess savings would drive down US rates and push up US investment and push down US savings is a bit too US-centric.   Lower rates globally might induce larger capital flows to emerging markets, more investment outside the US, or even less savings in countries with savings surpluses.   There are a range of possible responses other than even higher US housing prices and even lower US household savings  ... 

But Bernanke's savings glut speech also got two key things right - 

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan.

The $546 billion increase in the U.S. current account deficit between 1996 and 2004 must therefore have been matched by a shift toward surplus of equal magnitude in other countries. Which countries experienced this change?

As we can infer from table 1, most of the swing toward surplus did not occur in the other industrial countries as a whole (although some individual industrial countries did experience large moves toward surplus, as we will see). The collective current account of the industrial countries declined more than $441 billion between 1996 and 2004, implying that, of the $548 billion increase in the U.S. current account deficit, only about $106 billion was offset by increased surpluses in other industrial countries. As table 1 shows, the bulk of the increase in the U.S. current account deficit was balanced by changes in the current account positions of developing countries, which moved from a collective deficit of $90 billion to a surplus of $326 billion--a net change of $416 billion-- between 1996 and 2004."

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

A third concern with the pattern of capital flows arises from the indirect effects of those flows on the sectoral composition of the economies that receive them. In the United States, for example, the growth in export-oriented sectors such as manufacturing has been restrained by the U.S. trade imbalance (although the recent decline in the dollar has alleviated that pressure somewhat), while sectors producing nontraded goods and services, such as home construction, have grown rapidly. To repay foreign creditors, as it must someday, the United States will need large and healthy export industries. The relative shrinkage in those industries in the presence of current account deficits--a shrinkage that may well have to be reversed in the future--imposes real costs of adjustment on firms and workers in those industries.

Both the fact that Bernanke "gets" the current global flow of capital and the fact that he recognizes that adjustment is not painless give me hope.   Plus, Bernanke recently has been moving away from the extreme version of the savings glut thesis, even hinting that cuts in the US fiscal deficit would help to reduce the current account deficit ...

Update: In the free portion of the main RGEmonitor webpage, we have gathered together material for a crash course on three of the likely policy debates in the Bernanke Fed: Inflation targetting; the Global savings glut and the "Bernanke" put.   Suggestions for additional readings on these topics are always very welcome.

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United States

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