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May 06, 2005
Clarida Seconds The Global Savings Glut Hypothesis
Hat tip to Don Boudreaux for linking to an article by Richard Clarida, former Assistant Secretary of Treasury, wherein Professor Clarida echoes Ben Bernanke's take on the U.S. current account deficit.
It is important to appreciate that the U.S. current account deficit is a general equilibrium phenomenon and is, in part, a reflection of a global excess of saving relative to profitable investment opportunities in the post-bubble world... I note that in a world, like the present, in which there is a global excess supply of saving relative to investment, some country or group of countries must absorb the surplus of internationally mobile capital... I conclude that the United States, because of the role of the dollar as a vehicle currency, because of the depth and breadth of the U.S. financial markets, and because of the credibility of U.S. monetary policy, is destined for some time, as it has been for the last 20 years, to run a structural international capital inflow, and thus a structural current account deficit.
Put Clarida down in the soft landing column:
I expect that over time the U.S. current account deficit will narrow, and certainly hope that this occurs in the context of a growing and prosperous global economy. Indeed, I see no reason to expect that this adjustment will be disorderly.
On China:
I believe that there is a sound case for a revaluation of the currency within the context of the present fixed exchange rate system...A once-off revaluation of the currency, perhaps in conjunction with moving to a wider band and a peg to a basket of currencies, would be an appropriate policy response by the Chinese who have themselves expressed a desire to avoid the overheating of the Chinese economy.
... some degree of gradualism is appropriate in the broader context of China’s effort to shore up the banking system and to deepen and broaden the foreign exchange market. However, a step that could, and I think should, be taken immediately would be to revalue the currency within the context of the present system of capital controls.
May 6, 2005 in Asia, Exchange Rates and the Dollar, Trade Deficit | Permalink
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rjw |
May 07, 2005 at 08:51 PM
Funny that whenever I read an article talking about savings gluts I 'm never clear whether the author is talking stocks, flows, or something in between. And the distinction between saving as behaviour and saving in national accounting terms is kinda skated over too. I wish we could outlaw the term.
As I see it there are two separate stories, one mainly to do with stocks, the other with flows.
The first (stocks) is the 'big pool of money' theory - that there was a big pool of money 'out there' that decided to land in the US, driving up the exchange rate, lowering interest rates, and allowing a US consumer boom. This one fits quite well metaphorically with the notion of a glut.
The obvious question though is - where did this big pool of money come from ? And why did it end up here? Well - to test the plausibility of this story I guess we have to ask: Who holds these US assets? Why have they chosen to increase their holdings? Why this active shift into US assets? How did this big pool of money get created?
The second story is the 'structurally spendthrift american' story. Here we see the US consumer, bouyed up by the good years of the 90s and a serial liking for imported goods racking up huge bills on credit, while demand elsewhere is sluggish, and the rest of the world accumulates dollars by default.
Here we could look at what is happening to saving rates, world demand growth, import propensities and so, for some ideas of the plausibility of this story.
It seems to me that these are two different mechanisms and causalities, but they are not clearly enough distinguished. In fact, in some text one gets the impression they are equivalent. This lack of clarity is not helped by the confusing use of 'saving' sometimes using the term in a sense consistent with national accounts reasoning, and sometimes as a behavioural parameter.
For example the notion that people saving more (consuming less) outside the US creates a 'big pool of money' out there just waiting to rush in. This reasoning I don't really follow, because low demand outside the US (which is a flow) doesn't automatically creat any big pool of money (which is a stock) just waiting to rush in.
Of course -in national accounts terms there is a linkage between stocks and flows. If the US runs a deficit then, by definition, the net increase in US assets over a period held by those outside the US counts as 'saving' to them - but this is accounting and does not tell you anything (behaviourally) about why the deficit came about.
For that you have to look at the shifts in stocks and flows and the behaviour that underpins them.