Partial Recantation
David Wessel on the U.S as a Debtor Nation

Ben Bernanke's Glut Theory

Mark Thoma quotes the Economist on Ben Bernanke's "Glut Theory":

Economist's View: Is There a Global Saving Glut? If So, Will it Persist? : The Economist begins a series of articles on the global saving glut, global investment deficit, excess liquidity, and slow expected world growth hypotheses for the persistence of low long-term interest rates, with an emphasis on world saving patterns.... [The] introductory piece asks whether Ben Bernanke... was correct to deflect criticism over the current account deficit away from U.S. policymakers. It concludes that the U.S. must shoulder more responsibility for global imbalances than Bernanke's global saving glut hypothesis allows.... [and] that rebalancing will take time and invlolve risks to the world economy....

The great thrift shift, by Zanny Minton Beddoes, The Economist: On March 10th 2005, Ben Bernanke ... argued ... the world might be suffering from a “global saving glut”. The phrase immediately caught on.... His suggestion that the causes of global imbalances lie elsewhere conveniently deflects attention from monetary and fiscal decisions.... It suggests that Mr Greenspan's loose monetary policy and George Bush's tax cuts are not responsible for the imbalances in the world economy. That may seem a little self-serving, coming from a man who has subsequently moved from the Federal Reserve to become chairman of Mr Bush's Council of Economic Advisers.

Taken at face value, the notion of a global saving glut is not borne out by the facts. “Glut” suggests an unusually large amount, as in a summer glut of strawberries. In fact, figures published in the IMF's latest World Economic Outlook show that the rate of global saving as a proportion of global output, measured at market exchange rates, has mostly been heading downhill over the past 30 years....

But Mr Bernanke's argument is more subtle. He is saying that low interest rates imply too much saving relative to the amount people want to invest, and that the... discrepancy is concentrated outside America....

A weak appetite for investment might help explain low interest rates, but not the rising imbalances between America and the rest of the world. To understand those, two other factors have to be considered: differences in countries' economic structures, and differences in policymakers' reactions to the investment bust....

To protect exports and to build up vast war chests of reserves, many East Asian governments kept their currencies cheap for years after the financial crises. Firms stayed reluctant to invest, the saving surpluses remained large and the foreign-exchange reserves piled up... a good part of the rising imbalances of the past few years can be explained by a series of investment busts—-after periods of overinvestment—-and sharp differences in the way policymakers responded to them. But particularly since 2000, two other factors have also become important: more saving in China, and the soaring price of oil....

These shifts have... had important and unusual consequences.... One camp argues that the saving glut Mr Bernanke has identified is a temporary and largely cyclical phenomenon.... But a growing group of analysts now suggests that the “saving glut” is the result of long-term structural shifts and is likely to last for years, perhaps decades.... If the “saving glut” really is here to stay, there are two main possibilities. The first is that America's consumers will continue to barrel along and the imbalances between America and the rest of the world will increase further. The second is that Americans themselves will start saving again, perhaps because the housing market falters.... With the rest of the world still determined to save too, that would send the global economy into a tailspin....

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