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The End of the “Global Savings Glut”?

Regardless of whether America's persistent current-account deficits really can be explained primarily by the accumulation of excess savings abroad, recent developments now promise to render this popular theory obsolete. If so, the turmoil we have seen in bond markets so far this year could be just a prelude.

LONDON – In 2005, Ben Bernanke, then a governor of the US Federal Reserve Board, introduced the idea of a global savings glut to explain why the United States ran persistent current-account deficits. Departing from much of the academic thinking of the 1980s and 1990s, he argued that excess savings outside the US made interest rates – particularly long-term rates – lower than they otherwise would be.

Bernanke was developing an idea that then-Fed Chair Alan Greenspan had also flirted with. The US current-account deficits persisted because US Treasury bonds appealed to savers around the world who were eager to hold supposedly safe assets. In the past, there had been an assumption that these persistent deficits would at some point jeopardize the stability of the dollar and force US interest rates higher as protection against inflation and domestic financial instability.

Bernanke’s thesis became quite fashionable in international monetary circles at the time. And it gained even wider currency after the 2008 financial crisis, when inflation was persistently low and US current-account deficits continued. From the late 2000s, many companies changed their saving behavior and started building war chests, lending further momentum to the idea.