In March 2005, Ben Bernanke, successor to Alan Greenspan as chairman of the Federal Reserve, followed the same logic, attributing US financial deficits to an "Asian savings glut." For the Fed, his argment is convenient almost to the point of being self-serving. But it seems right.
I basically agree. That is a bit of a change. Back in early 2005, there seemed to be as much of an investment dearth as a savings glut. And some of the world's excess savings seemed to stem from an excess of fiscal stimulus in the US. But since then, the amount of policy stimulus in the US has been scaled back while the savings surplus of China and the oil exporters has soared.
There remains one key point of difference. I still think Bernanke downplayed the role government policies -- whether exchange rate pegs that have led to a surge in reserve growth, bank policies that have restrained credit growth to help sustain a real undervaluation or fiscal policies that have saved a very large fraction of the oil surplus -- have played in generating the savings glut. Combine the savings of China's state-owned business sector with the savings of oil-exporting government and it sure seems that the global savings glut is really a government savings glut.
China right now clearly has savings glut, not an investment dearth -- at least is a glut means more than you know what to do with. China's surging current account surplus (its savings surplus) has come in the face of surging investment. And China's surging surplus has come in the face of a surging bill for imported oil -- indeed, for imported commodities of all kinds.
Indeed, the fact that China's "savings" surplus has soared -- keeping Asia's overall "savings" surplus growing -- even as higher oil prices increased the "surplus" savings of the oil exporters goes a long way to explaining the "glut." Higher oil prices -- and higher oil state savings -- could have been offset by lower savings in all oil importing regions. But the savings surplus of one oil importing region (Asia) has increased along side the oil surplus. That has left plenty of funds to finance deficits in the US and elsewhere at fairly low rates.
While I am marking my views to market, so to speak, I should formally recognize that the Michael Dooley, Peter Garber and David Folkerts-Landau have gotten an awful lot of things right over the past two years. They missed the impact of the oil exporters' dollar peg, but it fits neatly into their overall hypothesis. The set of countries adding to their reserves has changed, but all available evidence indicates that the surge in emerging market reserve accumulation that started in 2002 has been sustained. 2006 reserve growth looks likely to at least match its 2005 levels.
China and the GCC countries continue to peg to the dollar. And a range of emerging economies -- not the least Brazil in recent months -- intervene to keep their currencies from appreciating.
The core issue raised in my Econoblog with Michael Dooley was whether or not an international monetary system based on large-scale reserve accumulation in the "periphery" that financed large deficits in the center was sustainable. Score the last two years for Dooley, Garber and Folkerts-Landau.
There is some evidence that China is tiring of its current pace of reserve growth. But there is little evidence that it is willing to allow a major move in its currency, one sufficient to really scale back its reserve growth. Rather, China seems to be desperately trying to convince Chinese firms not to convert their export earnings (as well as the money the State banks have raised from their IPOs) into RMB. That effectively just shifts dollar asset accumulation from one part of the state (the central bank) to another (state-owned banks and firms).
On one point though, I will claim a minor victory. I emphasized that that any stable international monetary system needs to be politically as well as economically sustainable. And I argued that China's resistance to RMB appreciation would bring about a predictable political backlash inside the US against trade with China. That prediction seems pretty accurate.
It is also one of the risks that Dumas and Choyleva highlight.