« Who Will Watch How the Watchmaker Works? | Main | The European Central Bank Shows Signs of Facing Reality »

June 22, 2005

Not a Savings Glut, an Investment Deficiency

Daniel Gross writes about the "savings glut." But world savings are not that high: the swing of the U.S. federal budget from $200 billion annual surplus to $350 billion deficit alone--that's a decline in savings equal to 30% of China's entire current exchange rate GDP. It's not so much a global savings glut as a worldwide investment shortfall.

Daniel writes:

Savings Glut - The self-serving explanation for America's bad habits. By Daniel Gross: Why are there imbalances in the global economy?.... Newly emerging conventional wisdom takes the opposite view. The problem in today's global economy is that the rest of the world, in particular people in Asia, consume too little and save way too much.... The lead article in today's Wall Street Journal speaks of a global housing boom spurred by a "saving glut."... Ricardo Hausmann... notes that "excessive savings are at the root of the imbalance in China."... the FT applauds a tentative sign that the Japanese... are showing signs of spending and investing more.

The savings-glut meme, which could soon become an important part of our monetary policy, has emerged from economists' efforts to come to grips with what Federal Reserve Chairman Alan Greenspan has labeled "the conundrum."... [L]ong-term interest rates should be higher. But they've fallen...

Ben Bernanke... has come up with an explanation... a "global saving glut."... A bigger and more powerful source of excess savings, however, is found in newly industrializing countries like China.... Richard Clarida, the former assistant treasury secretary and a candidate to be a Federal Reserve Governor, advanced the meme by arguing that our twin deficits are an example of good global citizenship. When there's more savings relative to investment, he wrote in the Wall Street Journal... "not only will real interest rates be driven down, but some country or group of countries must run current-account deficits to absorb the excess saving."...

On his blog, economist Brad Setser raises some interesting questions about Bernanke's argument. More curious is what Bernanke—-and other saving-glut champions—-want us to conclude.... The savings-glut meme changes the terms of the conversation about global imbalances. It's not our fault that we rely on foreigners to fund our desire to spend in excess of our resources.... The savings glut may be an accurate and subtle take on the world's economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings...

Posted by DeLong at June 22, 2005 03:38 PM