Savings Glut

Savings Glut

1. WHERE?

   • China
     • Attractive culprit-> lay blame on currency management policies
       • Roubini
         • US borrowing problem reached 10% of GDP before collapse
     • 0.0042 cc per person vs 4
     • Gross saving 50% of GDP
   • Oil
     • Bloated revenues
     • Tend to have fixed/managed ER thus increased CB reserves
   • US
     • US fiscal prolific and a consumption binge
   • Asian
     • Build international reserves following 1990

2. EVALUATION

   • US CA deft autocorrecting
     • Decline in private consumption vs $
   • Epicentre became safe haven
   • US still demander of last resort

3. Stiglitz

   • Able to import capital on better terms.

4. Greenspan

   • Bond market conundrum-> disconnect between LR IR and fixed rate mortgages rates.
   • Search for yield-> FM-> implicit guarantee by the Treasury.

5. Turner Review

   • Foreign ownership of UST risen from 20% in 1994 to 57% in 2007.
   • Risk free rates at historically low levels.

6. Reinhart

   • Capital flow bonanza
   • Rising asset prices, slow real economic activity, large CA deficits and sustained debt buildups precursors
   • Europe-> Sudden stops and tailspin.

7. Obstfled & Rogoff

   • US soaking up more than 2 out of every 3 of these saved dollars in 2004-6.

8. Krugman

   • Wile E Coyote moment unsustainability of US CA $ would collapse.
   • Hard to imagine crisis without international monetary movements-> US and Europe.
   • Ocean of money-> markets will always self-correct.

9. My View

   • Amplifying mechanism rather than a trigger
   • Cushions in FE eroded and fiscal finances deteriorate
   • Productive investment opportunity
   • Root of all evil flood of foreign money not propensity of US to over consume
   • Not necessarily excess savings-> Fiat money

10. Bernanke

    • Global savings glut 2005
      • Reinforcing-> pushed up dollar and deficit
    • Loanable funds theory of interest
    • Explained Greenspans conundrum
    • Weaker exports and deficit
    • Innocent bystander

11. Summers

    • Secular stagnation
      • Excess savings
    • Weaker investment and consumption in individual countries