For Whom America’s Bell Tolls

These days the Chairman of President Bush’s Council of Economic Advisers, Ben Bernanke, likes to talk about a “global savings glut” that has produced astonishingly low real interest rates around the world. But that is the wrong way to look at it.

America certainly does not have a savings glut. Its savings rate has been distressingly low for decades. Then the Bush administration’s reckless fiscal policy pushed it lower. Falling interest rates in recent years pushed up real estate prices and allowed America’s upper middle class to treat their houses as enormous ATM’s, lowering savings still more. America has a savings deficiency, not a glut.

And the rest of the world? A global savings glut would suggest that rebalancing the world economy requires policies to boost America’s savings rate and to increase non-US households’ consumption. But what the world economy is facing is not a savings glut, but an investment deficiency.

Divide the world into three zones: the United States, China, and all the rest. Since the mid-1990’s, the net current-account surplus of “all the rest” has risen by an amount that one Federal Reserve Bank economist has put at $450 billion a year, not because savings rates have increased, but because investment rates have fallen. Declining investment rates in Japan, the newly-industrializing Asian economies, and Latin America, in that order of importance, have fueled the flood of savings into US government bonds, US mortgage-backed securities, and US equity-backed loans – the capital-account equivalent of America’s enormous trade deficit.