Why are there imbalances in the global economy? Until recently, conventional economic wisdom has held that the U.S. has a huge trade deficit, a gaping current account deficit, and large federal budget deficits because Americans consume too much and save very little. 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.
Signs of this meme can be seen all over. The lead article in today's Wall Street Journal speaks of a global housing boom spurred by a "saving glut." An op-ed in today's Financial Times by Ricardo Hausmann of Harvard notes that "excessive savings are at the root of the imbalance in China." Elsewhere, the FT applauds a tentative sign that the Japanese—"who control the world's largest pool of savings," some $1.28 trillion—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." In a speech to a conference in China last week, Greenspan offered an uncharacteristically concise précis. Given the pace of growth in the U.S., the current account and budget deficits, and the sharp spikes in short-term interest rates, long-term interest rates should be higher. But they've fallen—in the U.S., Europe, and even in developing economies.
Ben Bernanke, the Princeton economist and former Federal Reserve Governor who was approved yesterday by the Senate to head the Council of Economic Advisers (and who is the odds-on favorite to replace Greenspan next year), has come up with an explanation that he first articulated in a speech in March: There's a "global saving glut." Bernanke identified two main sources. First, there are the rich industrialized countries with graying populations and slow growth, where people need to save more for retirement and yet can't find attractive domestic investment opportunities (think Old Europe and Japan). A bigger and more powerful source of excess savings, however, is found in newly industrializing countries like China. As Bernanke notes, in the past decade the developing world has metamorphosed "from a net user to a net supplier of funds to international capital markets."
China, and other countries in Asia and Latin America, responded to the financial crises of the 1990s by putting controls on capital flows, building up reserves of foreign currency, and encouraging more savings. Add in a rise in oil prices (which sends cash to the developing world) and the stock market bust of 2000 (which made people reluctant to put cash to work in equities), and that's a lot of money sloshing around the developing world. Because the U.S. is such a comparatively attractive place to invest—even after the NASDAQ meltdown—a lot of that capital has found its way to America. By running large budget and current account deficits, then, the U.S. acts like a sponge, soaking up the world's excess savings and providing it with a decent return.
In April, Columbia University Professor 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 (here's the link, but a subscription is required), "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."
In other words, as Martin Wolf, the FT's chief economics correspondent, noted in a big saving-glut takeout (subscription also required) earlier this week, the U.S. is doing the world a favor. "In a global economy with no global government, the most important regional power—the US—has been following the Keynesian recommendation by offsetting excess desired savings elsewhere."
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. He diplomatically noted that, "in locating the principal causes of the U.S. current account deficit outside the country's borders, I am not making a value judgment about the behavior of either U.S. or foreign residents or their governments." But of course he is. Bernanke tells us not to worry so much about the federal budget deficit—reducing it won't affect interest rates significantly. Meanwhile, foreigners should "ease borrowing constraints, to spur domestic consumption." The subtext of the meme is that Asians have to become big spenders and little savers like the British and Americans.
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. Au contraire. Our extreme consumption and failure to save become something of a virtue. Somebody has to keep the world's factories humming and absorb all the products made in Japan, China, and elsewhere. And until the rest of the world becomes More Like Us in its consuming habits, the imbalances are likely to persist.
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. No wonder Bernanke is so popular at the White House.