The Saver’s Dilemma

Interest rates are now close to zero throughout the developed world, but the global economy is slowing down, and financial markets went into a tailspin during the summer. The fundamental problem is simple: the market cannot be brought back into equilibrium when savers do not want to lend to those who would be willing to take these savings.

BRUSSELS – Interest rates are now close to zero throughout the developed world (the United States, Europe, and Japan). But the global economy is slowing down, and financial markets went into a tailspin during the summer. This suggests that the problem is more profound than one of insufficient monetary stimulus.

The heart of any economy is the mechanism by which funds are channeled from savers to investors. In normal times, capital markets perform this function smoothly; but these markets break down from time to time, owing to sudden large changes in perceptions about the riskiness of important asset classes.

In the US, this happened when investors discovered that even AAA-rated asset-backed securities were in reality risky. China experienced a similar surprise when the US government lost its AAA rating. But nowhere is the problem as acute as it is in Europe, or, rather, the eurozone, where German savers are suddenly discovering risk across the European periphery.

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