I was and am reading ‘The revenge of the market on the rentiers’ by Jose Gabriel Palma, Faculty of Economics, Cambridge University. So far, so good. He had referred to the savings glut hypothesis that US policymakers were fond of peddling in the early years of the new millennium. The hypothesis has not been abandoned. Ben Bernanke (who else?) brought it up again in his blog post dated April 1, 2015. Palma’s mention of the Savings Glut hypothesis triggered this blog post.
Excess savings by Asians (and others) have been blamed variously for low interest rates in the US, for slower growth, etc. From 2003 and up to 2008, the world was not suffering from low growth but the opposite. There was overheating. The overheating did not manifest much (if at all) in conventional inflation measures because they had been rigged beyond recognition, through hedonic adjustments. It showed up in asset price bubbles around the world and in high commodity prices.
So, global savings glut really did not bring growth rates down, at least up to 2008. Post-2009, China’s current account surplus has shrunk quite considerably. Oil producing countries simply did not and do not have the capacity – in more ways than one – to do much with their surpluses. They recycled then in the 1970s and they are recycling now. Their surpluses will have shrunk big time in 2014-15. Only in Europe, are their huge current account surpluses. German austerity imposed on Southern Europe is now the villain, according to the U.S.
America – a society of instant gratification – has never really believed in the long-term when it comes to spending and saving. It probably wants to optimise consumption and savings over an election cycle. Other societies might wish to optimise them over a life cycle. In any case, as I had blogged here, German wage growth is faster than in the U.S and countries that had excess demand and debt leading up to their present predicament must, indeed, tighten their belt. It is reasonable.
Jean Claude Trichet who was in Singapore last month pointed out that salaries of civil servants rose cumulatively more than 100% (117%?) in Greece in the first decade of the single currency and that they rose a cumulative 20% in Germany in the same period. QED.
Savings glut is supposed to have led to lower interest rates in the US, encouraging all the leveraging that one saw there and, bingo, the crisis itself. Palma puts this in perspective brilliantly here:
The bottom line is that while Asia’s reserves grew by US$2.2 trillion between 1997 and 2007, the overall stock of financial assets grew by US$140 trillion (US$ at 2007 values). As a result, by 2007 the overall Asian ‘savings glut’ was equivalent to less than 1 per cent of the global stock of financial assets (at the time, equity, bonds and bank assets were worth US$241 trillion; see Figures 1 and 2). If this ‘glut’ were in fact the ‘smoking gun’ of the current crisis, never in the history of finance would anything have had such a multiplier effect…
As for the complaint that Asians (primarily China) engineered low interest rates, blunting the impact of American tightening, the answer is that Americans should have tightened more to offset the Asian purchases of US Treasury and Agency Securities. After all, their answer for the complaint that QE is not working is to recommend more QE. So, symmetrically, the answer should have been more tightening if monetary policy tightening was not being transmitted to interest rates at longer maturities.
The blame-game has prevented them from accepting the very real possibility that the Federal Reserve had interest rates too low for too long. Raised them too slowly and with far too much transparency as to encourage risk-taking. It practised regulatory forbearance to the hilt and allowed systemic leverage to build up to very dangerous proportions.
The American government, with the support and blessing of the Federal Reserve Board, had rigged the official measures of inflation so much that they did not see any problem with inflation. That gave them the fig-leaf cover to keep interest rates too low for too long. They consumed their own poison (the propaganda of low inflation).
Then, Bernanke sought to blame the Savings Glut for leveraged asset bubbles. Now, he blames the savings glut for slow growth. There is never any problem with monetary policy, with the Federal Reserve and with America.