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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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October 25, 2005


Getting The Savings Glut Right

Perhaps it is because he is the most forceful discouraging word at the moment, but for the second day in a row I find myself reacting to a comment from Barry Ritholtz at The Big Picture.  What got my attention this morning relates to Barry's reservations about Ben Bernanke's nomination to replace Alan Greenspan at the helm of the Federal Reserve Board of Governors:

My only reservations with Bernanke are a couple of his speeches as a Fed Governor:

The Global Saving Glut and the U.S. Current Account Deficit -- was just so much political blather. It completely fails intellectually.

I have used the global savings glut story many times -- most recently here -- but I do agree with those that have urged us to put more emphasis on the global investment bust side of the story. Although a glut by definition implies a surplus relative to a deficit in something else, from which side of the saving-investment equation the surpluses arise is relevant for many of the policy questions we want answered.  But that quibble aside, I think Brad Setser has exactly the right perspective:

But Bernanke's savings glut speech also got two key things right -

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan...

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

An intellectual failure it was not.

October 25, 2005 in Trade , Trade Deficit | Permalink

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Listed below are links to blogs that reference Getting The Savings Glut Right :

» More Glut from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 26, 2005 1:09:14 PM

» More on the Savings Glut meme from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 29, 2005 7:04:51 AM

Comments

I also think Brad got it about right with regard to the savings glut. He raises some important questions that are worth debating.

Posted by: William Polley | October 25, 2005 at 08:52 AM

The savings glut argument is a semantic game that reminds me of The Simpsons:

"Oh, meltdown. it's one of those annoying “buzzwords." We prefer to call it an unrequested fission surplus."

While that settles the issue for me, others may want more details:

1) The US savings rate is almost nonexistent; It is exceedingly difficult for a stone cold drunk to lecture others on the virtues of fine wine;

2) Much of the rest of the world looks somewhat askance at what is often called the "excessive consumption" in the U.S.

Consider Europe: Their culture is much longer vacation time than us, shorter working week, and most of the Summer off. They are not nearly the consumer society we are. For us to suggest that Europeans need to start buying more stuff is not only unrealistic, it generates guffaws.

3) In all seriousness, The Savings Glut argument is a defense of a structural imbalance via a mostly painless solution, rather than the difficult medicine (most adults) know are necessary to cure the problem.

4) Then there's the "careful what you wish for" factor: What would happen if the rest of the world suddenly decided to go on a spending spree, racking up big debts, rather than buying our bonds?

Sheesh, tis a scary thought . . .

Posted by: Barry Ritholtz | October 25, 2005 at 02:43 PM

While I tend to agree with Barry that the global savings glut thesis does not fit the facts, I never considered Bernanke's statement to be motivated by GOP politics. It is interesting to note that the Bush cheerleaders over at the National Review do not like this appointment either - but their "reasoning" is full of BS. But then - what's new?!

Posted by: pgl | October 25, 2005 at 04:45 PM

I reread Brad Setser's piece (Here: http://www.rgemonitor.com/blog/setser/105474).

Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut
is a self-serving explanation for America's bad habits (see this: http://slate.msn.com/id/2121017/), Setser goes on to list 5 major criticisms of the Savings Glut theory.

The two nice things he said was little more than a polite coda, IMHO

Posted by: Barry Ritholtz | October 25, 2005 at 05:25 PM

Ben Bernanke is more than welcome to quote or attempt to dispute my conclusions as outlined below. I believe the following explanation is accurate and comprehensive.

Dave, your people at the Cleveland Fed are welcome to try to take it apart. I have plenty of CEOs and other heavies sitting on my side of the table.

Economic Hydrology Theory

The Future of Domestic Production versus Offshoring and Outsourcing to Foreign Locations

Once the WTO and national governments improved the opportunities for corporations to invest in the least expensive global production locations, the stage was set. Coupled with continually improving transportation and communications efficiencies, the successes of offshoring and outsourcing corporations which led the way were met by competitive desires of other corporations to also seek new lowest cost production sources. At present, over 450 of 500 top U.S. corporations have operations in China, as an example.

Unimpeded and with regard to available skill levels and technologies, corporations will seek out the lowest cost blue collar and white collar production sources on the planet and will create new production empires in those locations as fit their market needs. Currency manipulations and other foreign and domestic government incentives that improve foreign-based blue collar and white collar production opportunities increase the rate of flow or transference to such locations. The larger concentration of global production in lowest cost production environments results in a convergence of foreign direct investment (FDI) monies targeted toward achieving greater scales of production at these locations. This effort, in turn, minimizes the need for investment and development elsewhere by such corporations which further eliminates the logistical and technical support chains that previously existed for duplicate operations at facility locations in other nations. The results are reduced overall investment costs, reduced production costs, labor substitution, and reduction of related supporting logistical and technical support services and employment in other nations.

----

Good Luck, Ben.

----

Posted by: Movie Guy | October 26, 2005 at 03:05 AM

Well since Ben Bernanke himself is probably suffering from a bit too much overbooking to speak out in his own defence, I'll throw in my two centimes worth (from here in Euroland) to see if I can throw any light on why he holds to such an apparently 'intellectually flawed' hypothesis. (gee, for someone who's main strength has been argued to be his intellectual prowess, this would certainly seem to be a failing were it to hold).

First I think that what needs to be said is that Bernanke did not simply talk about a "global savings glut", he spoke about the 'glut' *and* the US CA deficit, and it was undoubtedly this association which lead to all the fuss.

It was thought that Bernanke was trying to *justify* the CA deficit. I would argue he wasn't trying to justify anything, he was trying to understand something. I wish more people would follow his example in this sense.

And what was he trying to understand? He was trying to understand something which apparently has even Alan Greenspan puzzled: why long term interest rates remain at stubbornly low levels.

Bernanke was trying to understand and explain this phenomen, and I think it is behoven on his critics , in rejecting his explanation, to offer - as surely they are entitled to do - some rival hypothesis.

Simply to say that monetary policy has been extremely accommodative is circular and begs the question: why has monetary policy been able to be extremely accommodative, indeed, as Dave would be the first to recognise, why are central bankers having great difficulty in easing them upwards without pushing against yield-curve inversion?

This was Bernanke's first problem.

Clearly it is the historically low level of long term rates which facilitate the US CA deficit, even if the mechanism is via a wealth effect on US consumers produced by a housing boom which is fuelled by these same rates.

By-the-by Bernake made what I think is the extraordinarily obvious point that there is no necessary connection between substantial and sustained fiscal deficits and CA balances, with high government deficiters Germany and Japan running ongoing surpluses. This I think is what brought the boiling oil down on Bernanke's sun-baked back.

Now what did Bernanke actually say about saving? Well......

"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad."

Here we have one key point: demographic changes in the ex-US Oecd world are producing ever-higher saving rates, *and* a weak-internal-demand driven dearth of investment opportunities.

Some have referred to Bernanke's linking of saving and investment here as subtle. Pah! I would say it was basic Econ 101, ineed I would say that anyone who doesn't have the basic intuition involved here shouldn't even bother signing up for Econ 101. Saving and investmnent are connected, normally via interest rates, and low interest rates normally should be seen as indicating something about the supply of savings and the demand for investment.

Bernake here is simply citing IMF orthodoxy about the impact of demographic changes on global trade and savings patterns (see WEO October 2004, Chap 2), and the result of a lot of simulation studies which all point in the same direction.

Where I think what Bernanke said might be criticised is for using "too broad a brush". This is also something which has allowed his critics in through the back door. What he declares to be a stylised fact of all mature industrial countries is far from such. It is not true, for example of France, it is not true of the UK. So the argument does obviously need refining.

I have been arguing that we need to consider two factors here: median ages, and the rate of ageing. The two countries with the highest median age, Germany and Japan (both over 42) are well-characterised by this account, as are countries which are ageing rapidly (S Korea, Hong Kong, Taiwan, Singapore).

China is a connundrum, and many factors are undoubtedly in play, but at least part of the explanation for China's high saving rate must surely be the very rapid increase in life expectancy and the fact that the economically more prosperous urban population have few descendants thanks to the one child policy.

Bernake's thesis, however, isn't limited to the developed world since:

"a possibly more important source of the rise in the global supply of saving is the recent metamorphosis of the developing world from a net user to a net supplier of funds to international capital markets".

So why the change? Well, for Bernanke:

"In my view, a key reason for the change in the current account positions of developing countries is the series of financial crises those countries experienced in the past decade or so"

This view has been criticised on the grounds that many of those who suffered most during the crisis have now carried out "balance sheet repair" and this argument surely has a ring of truth to it.

Again, I think the original view needs re-defining, just as the term "mature industrial economies" is far to broad, so too is the term "developing countries", since in this he includes states as diverse as S Korea and Thailand (which are, in fact, rapid agers) and the oil exporting states which still (ex Russia) are extraordinarily youthful in general (ie still have to pass through the full demographic transition). Interpreting saving in this latter - oil producing - context again isn't easy. One explanation could be 'income smoothing' (if you expect the price of oil to fall again) or another could be a 'lop-sided' development impact with the sudden surge in earnings skewing even further societies with high levels of inequality and corruption.

Be that as it may, the absence of theory doesn't decry the reality, which is the accumulation of savings, and lower global interest rates, which is why I think the 'savings glut' argument will prove to be more than something of a passing intellectual fad.

Incidentally Barry, since Brad S doesn't seem to have passed by, he is *not* a 'savings glut' argument groupie (which I must admit I unashamedly am). He simply recognises that *some* of Bernanke's arguments make sense.

Also, from over here in ol' Europe, we love leisure, but not the kind which means that participation rates from 55 onwards are ludicrously low, and Paygo pension funds in constant danger of un-balancing. Also, there is no 'typical' EU ageing profile. French fertility is not that different from that in the US, the UK is still comparatively 'young'. The big agers are Germany, Italy and Spain. The interesting thing will be to watch whether after the housing boom ends Spain will enter the group of glut-inducing savers.

Posted by: Edward Hugh | October 26, 2005 at 04:40 AM

ok, I am a bit late to this party, but:

1) I cannot match Edward on aging, but I do know a thing or two about emerging market balance sheets, and to me, the "balance sheet" repair argument is the weakest bit of Bernanke's argument. China simply never had a external balance sheet weaknesses that it needed to repair (its levels of external debt to reserves were always healthy, and it has very small currency mismatches), and, while it is not worth going into here, buidling up fx assets to me is of very little use when it comes to repairing the domestic balance sheets of the banks. shifting fx reserves to the banks as capital just transfers the central banks currency mismatch to the banking system, and to a large degree, it has substituted for more fundamental repair. bottom line, balance sheet repair cannot explain why china's reserves went from 30% of GDP to 50% of GDP over the past couple of years. And Russia also has by now more than repaired its balance sheet, and it truly did need some repairs back in 99 and even 00 -- I take balance sheet vulnerabilities seriously, but reserve accumulation in EM land accelerated AFTER the key balance sheets already had been repaired.

2) you will note that I don't criticize Argentina, Brazil or Turkey for reserve accumulation -- i think all three have balance sheets that are still under repair. Turkey in particular should have built up reserves (net reserves) by intervening to offset lira appreciation in my view.

3) I think Bernanke's initial speech did put too much emphasis on the savings side, and only later did he modify his presentation to include the fall in investment ... it works better on those terms. ironically, it also works pretty well right now, largely because of the late 04 deceleration in investment growth in china led savings v. investment to swing a bit, and, above all, cause of the oil exporters.

4) I would note that a global savings glut (relative) to investment triggered larger net private capital flows to China (do the math -- FDI + hot money was 10% of GDP or so in 04; maybe a bit less in 05) but none of the mechanisms that Bernanke indentified that turned a smaller surge in inflows to the uSA into lower savings and investment took root in China -- presumably b/c the chinese authorities resisted. lots of my critique of bernanke comes down to not emphasizing enough that the private flow of capital has shifted back to emerging markets.

5) both my critique and my points of agreement were sincere -- I cannot tell you how often I run across arguments that work off the premise that emerging markets need access to financing from the US in order to develop. Maybe. But right now, the US needs financing from emerging markets even more ... Dooley et al also got the basic flow of funds right. lots of folks don't. this is one of my biggest pet peeves.

6) finally, edward, i would note that according to the IMF, investment in the euroland as a whole is about the same as investment in the us as a share of GDP, and if you net out residential investment, it might well be higher -- the big difference is not "attractive investment in us, but not in europe" so much as that, setting spaniards aside, europeans save and we here don't.

Posted by: brad setser | October 27, 2005 at 01:15 AM

p.s. i also don't like the 20 cents on the dollar fed study for the impact of fiscal adjustment on the current account quite as much as bernanke does ... but my critique of that study (which assumes lots of crowding out) is a bit at odds with my crique of the glut -- edward is right, the core mystery is why us real long-term rates are as low as they are despite the big swing in fiscal toward a structural deficit. Bernanke was on to something, even if i don't buy his balance sheet repair explanation ...

Posted by: brad setser | October 27, 2005 at 01:19 AM

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