The Long Mystery of Low Interest Rates

CAMBRIDGE – As policymakers and investors continue to fret over the risks posed by today’s ultra-low global interest rates, academic economists continue to debate the underlying causes.  By now, everyone accepts some version of US Federal Reserve Chairman Ben Bernanke’s statement in 2005 that a “global savings glut” is at the root of the problem. But economists disagree on why we have the glut, how long it will last, and, most fundamentally, on whether it is a good thing.

Bernanke’s original speech emphasized several factors – some that decreased the demand for global savings, and some that increased supply. Either way, interest rates would have to fall in order for world bond markets to clear. He pointed to how the Asian financial crisis in the late 1990’s caused the region’s voracious investment demand to collapse, while simultaneously inducing Asian governments to stockpile liquid assets as a hedge against another crisis. Bernanke also pointed to increased retirement saving by aging populations in Germany and Japan, as well as to saving by oil-exporting countries, with their rapidly growing populations and concerns about oil revenues in the long term.