Doug Noland: Revisiting the Global Savings Glut Thesis

This is a syndicated repost courtesy of Credit Bubble Bulletin. To view original, click here. Reposted with permission.
‘Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets – rather than lending, as would seem more natural? What implications do the U. S. current account deficit and our consequent reliance on foreign credit have for economic performance in the United States and in our trading partners? What policies, if any, should be used to address this situation? In my remarks today I will offer some tentative answers to these questions. My answers will be somewhat unconventional in that I will take issue with the common view that the recent deterioration in the U. S. current account primarily reflects economic policies and other economic developments within the United States itself. Although domestic developments have certainly played a role, I will argue that a satisfying explanation of the recent upward climb of the U. S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving – a global saving glut – which helps to explain both the increase in the U. S. current account deficit and the relatively low level of long-term real interest rates in the world today. … As I will discuss, an important source of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders. To be clear, in locating the principal causes of the U. S. current account deficit outside the country’s borders, I am not making a value judgment about the behavior of either U. S. or foreign residents or their governments.’ Federal Reserve governor Ben Bernanke, ‘The Global Saving Glut and the U. S. Current Account Deficit,’ April 14, 2005
I was flabbergasted back in 2005 with Dr. Bernanke’s ‘global savings glut’ thesis. At that time mortgage Credit was in the process of expanding a still all-time annual record $1.436 TN. National home prices (Case-Shiller) were up better than 14% year-over-year. The California housing Bubble was coming completely unhinged. Nationally, household mortgage Credit was expanding at double-digit rates for the fifth straight year, as a powerful inflationary psychology took hold in U. S. housing markets and throughout mortgage finance. Moreover, overall system Credit continued to expand rapidly following 2004′s 9.2% growth (strongest since 1988). At 2.75%, the Fed funds rate was ridiculously low in comparison to rapidly inflating home prices and generally rising securities and asset prices.

This post was published at Examiner by Doug Noland ‘ November 26, 2016.