Saving glut and the failure of capital in the 21st century.

A 2005 Speech by Then-Obscure Ben Bernanke Predicted the Economic Tragedy of Our Time

A 2005 Speech by Then-Obscure Ben Bernanke Predicted the Economic Tragedy of Our Time

How the past two decades will shape the future.
Sept. 28 2016 2:57 PM

What Happens When Money Breaks the Rules?

A 2005 speech by then-obscure Ben Bernanke predicted the great economic tragedy of our time.

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Photo illustration by Slate. Images by Larry Downing/Reuters and Giphy.

On March 10, 2005, Benjamin Bernanke strode to a lectern in a room on the 23rd floor of the Richmond Federal Reserve office building. Over dinner, he delivered the 2005 Sandridge Lecture to the Virginia Association of Economists. At the time, he was a relatively obscure member of the Federal Reserve’s Board of Governors. A professor of economics on leave from Princeton, Bernanke was part of a cadre of low-key, technocratic, Republican-leaning economists who provided intellectual cover for the Bush era’s fiscal and monetary policies.

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As the sun set over the James River, Bernanke spoke in the stilted prose typical of central bank bureaucrats, attempting to explain a state of affairs that was somewhat surprising. At the time America’s account deficit—the difference between the amount of goods, services, and investment it was importing from overseas and the ones it was exporting—stood at $635 billion, or more than 5 percent of gross domestic product. The federal budget deficit, after having fallen in the 1990s, was rising again thanks to the Bush tax cuts and spending on the Iraq war. Orthodox economic theory held the existence of these very large twin deficits would push investors to demand higher interest rates on government bonds (and hence on mortgages and everything else). And yet the U.S. was somehow managing to finance these large twin deficits at low interest rates; in 2005, 30-year mortgages could be had for less than 6 percent.


Bernanke had a novel explanation for this state of affairs. “Over the past decade,” he said to the economists collected in that room, “a combination of diverse forces has created a significant increase in the global supply of saving—a global saving glut—which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”

At one level, the speech read as—indeed I dismissed it as—an excuse for America’s profligate policies. The U.S., Bernanke argued, was actually doing the world a favor by running these deficits. And accepting lower yields when the supply of debt was increasing seemed a strange thing for investors to be doing. Capital, by its nature, is dynamic and efficient, aggressively and constantly seeking the best possible returns. But because many foreign economies “face an apparent dearth of investment opportunities,” Bernanke argued, investors around the world were willing to plow their cash into safe assets overseas, like government bonds. Put another way, there was too much money out there in the hands of people and institutions that simply had run out of good ideas about what to do with it.

The 150 academic economists in attendance didn’t think they had heard anything earth shaking. Although the speech didn’t exactly move markets, in the ensuing weeks the saving glut quickly became a meme embraced by a wide range of pundits: Financial Times éminence grise Martin Wolf, the Wall Street Journal editorial page, Fed Chairman Alan Greenspan. It turns out that in his modest way, Bernanke presaged a crucial story—perhaps the story—about the global economy in the first portion of this century.

A defining (and frustrating) aspect of our era is that there’s too much money—both ready cash and cheap or free borrowing capacity—in the hands of the wrong people. And there is a widespread shortage of ideas about what to do with capital. Strange as it seems, as Bernanke warned us in Richmond, money in the 21st century simply doesn’t know what to do with itself.


The concept of the saving glut—and its mirror image, the ideas deficit—helps explain the extraordinary circumstances that have come to define our financial era. In a world awash in money, investors struggle to find returns and often settle for nothing. Rather than invest and spend, companies stockpile hundreds of billions of dollars on their balance sheets, where it is guaranteed to net no return. Governments that could borrow essentially for free practice austerity. The savings glut is self-reinforcing: When you don’t think you can find a good return, you’re less likely to invest, which lowers returns even more. Secular stagnation, as economists such as Larry Summers call it.

The effects of such a glut weren’t readily apparent in 2005. At the time, the vast sums of money sloshing around the world—from developed economies to China, from Europe to the U.S.—were fueling an epic mortgage and credit boom. After the bubble popped in 2008, money became available to some institutions and governments on incredibly easy terms. Bernanke, as chairman of the Federal Reserve, drove the price of overnight funding to zero in December 2008—an unthinkable move, were the world economy behaving in a rational manner. Such easy money would ignite inflation, thus pushing up interest rates; additionally, it would have been difficult for the U.S. government to attract money to fund its sharply growing deficits ($1.4 trillion in 2009) without investors demanding a higher interest rate. Meanwhile, the central banks of other developed countries were engaged in similar activity.

And yet. Not only did interest rates not rise, they fell. They stayed remarkably low as the global economy began to rebound. Bernanke and his successor, Janet Yellen, left the rate at zero for seven years. And rates fell even further as the expansion continued. We’ve seen an almost entirely new and unpredicted phenomenon—negative rates. In a global economy that is growing modestly, many investors are so desperate for safety that they purchase government bonds that offer interest rates below zero. This inversion—paying for the privilege of lending money—flies in the face of intelligent capital. And yet it has spread. First seen in Japan, negative rates are now evident—even prevalent—in Germany, Italy, and other European countries. Last summer, some $13 trillion in assets around the world had negative yields. The yield on Germany’s 10-year bonds is … negative 29 percent.

Think about it. Around the world, tens of thousands of people are tasked with managing capital—at central banks, insurance companies, pension funds, sovereign wealth funds, hedge funds. These people are motivated partially or wholly by the pursuit of money, and many of them get paid based on the returns they deliver. And a large percentage of them are content to have their capital essentially do nothing—or worse than nothing.


They’re not the only clueless capitalists. As corporate profits have boomed in recent years, business investment in the U.S. has muddled along. Flush with cash and able to borrow money for virtually nothing, companies are nonetheless facing, in Bernanke’s 2005 words, “an apparent dearth of investment opportunities.” Instead of spending their money on wages, or equipment, or research and development, companies buy back their own stock, share it with investors in small dollops or dividends, or simply sit on the cash—which gets no return. In total, American companies have about $1.7 trillion in cash, while Apple and Microsoft alone hold about $230 billion and $117 billion, respectively.

Youth is wasted on the young. And free money is wasted on those who don’t sink it back into the system. That’s the economic tragedy of our time and among the biggest threats to our future. America’s infrastructure is falling apart, and the government could borrow money to fix it for 10 years at less than 2 percent. But rather than investing in the future, the U.S. practices austerity, raising taxes and cutting spending. Germany’s government can get money for free—indeed, investors will pay for the privilege of lending money to it. The cost of getting more cash to build roads, or to fund tax rebates, or to boost social welfare spending—all of which would increase consumption and growth—is effectively nothing. And yet Germany is running a budget surplus, sitting on its cash like Apple!

Then there are (God help us) the ultrarich. The world’s hedge fund, venture capital, and private equity magnates have been among the prime beneficiaries of the last many years. The structure of the global economy funnels the benefits of growth disproportionately to the already-haves, and they, too, can borrow money for bupkis. But even the financial geniuses—especially the geniuses—don’t seem to have good ideas about what to do with their cash. They’re not even sitting on it; instead, herdlike, they’re plunging their fortunes into hackneyed, nonproductive asset classes: fine art, estates, high-rise condos in areas where the ultrarich already congregate. In 2014, hedge fund manager Paul Singer urged people to “check out London, Manhattan, Aspen, and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like.”

None of this was supposed to happen. Capital as we knew it in the 20th century was ruthless: amoral at worst, agnostic at best, scouring the globe for opportunities, funding new ventures and initiatives that represent opportunities to realize a return. Anything for a buck.

Things are different in the age of the saving glut. Of course there are exceptions: big investments in internet and wireless technology, in clean energy, in China and India. But on the whole, capital as we know it in the 21st century (thanks, Thomas Piketty) is defensive and reactionary. The conservatism is in part scar tissue from the financial crisis. To those traumatized by having lived through the overnight destruction of Lehman Brothers and the sickening 40 percent decline in the stock markets, a 0 percent return seems pretty good. If you fear losing everything, then you won’t look at a prospect that can’t absolutely guarantee you’ll keep everything.

But a lot of it has to do with a lack of imagination. If the best idea you have for your money is to buy a government bond that yields 1 percent, or to leave it in cash, or to run a surplus, or to buy a Picasso, that isn’t an idea at all. The longer acceptance of low returns goes on, the more likely that today’s comparatively wealthy (that’s you, Slate readers) miss out on the next phase of wealth creation. The world isn’t quite yet done developing. Far from it. In the future, somebody is likely to make a lot of money electrifying sub-Saharan Africa. But few American investors who lived through the financial crisis can imagine the investment structures that will guarantee returns on power plants in Tanzania.

It’s always dangerous to extrapolate recent financial trends indefinitely into the future. But capital’s complacency in the face of extremely low returns shows no signs of abating. And the implications are troubling. When companies, institutions, and governments fail to invest aggressively for the future, they tend to have a hard time accommodating and enabling growth when it does arise in their own backyards. (Think of how the New York region’s unwillingness to invest in maintaining and expanding its network of train and subway tunnels impacts the pace of growth and quality of life in neighborhoods that have seen significant development.) The expectation of low growth and low returns leads to low growth and low returns—and tends to perpetuate a sour, pinched politics. The longer the world’s central banks keep interest rates at or near zero, the more difficulty they’ll have returning them to the normal levels that foster truly healthy, dynamic markets. If capital doesn’t play by the rules for long periods of time, the rules may change.