Liveblogging World War II: April 4, 1943
Ryan Avent: Decoupling: One Expensive Euro

Global Savings Glut? Global Risk-Tolerance Shortage?

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Kenneth Rogoff:

The Long Mystery of Low Interest Rates: As policymakers and investors continue to fret over the risks posed by today’s ultra-low global interest rates, academic economists continue to debate the underlying causes… a “global savings glut” is at the root of the problem. But economists disagree on why we have the glut, how long it will last, and, most fundamentally, on whether it is a good thing.

I would point out that ultra-low interest rates are not accompanied by ultra-low equity yields. Current earnings yields on the S&P Composite are on the order of 6%/year. The way to bet is that profits right now are not cyclically elevated but rather cyclically depressed--as the economy gradually recovers to normal levels of activity relative to potential volumes will rise at least as fast as real wages, and profits will grow. Figure a cyclically-adjusted earnings yield of 7%/year at current stock market valuations, compares that to the -2%/year of current real short-term debt returns, and it looks like not a global savings glut but rather a global risk-tolerance shortage.

Ken continues:

Monetary policy… did not feature prominently in Bernanke’s diagnosis…. [But] I strongly suspect that if one polled investors, monetary policy would be at the top of the list…. Nevertheless, I share Bernanke’s instinct that… central banks… have virtually no influence over long-term real… rates….

One view holds that long-term growth risks have been on the rise, raising the premium on assets that are perceived to be relatively safe…. Another class of academic theories follows Bernanke (and, even earlier, Michael Dooley, David  Folkerts-Landau, and Peter Garber) in attributing low long-term interest rates to the growing importance of emerging economies, but with the major emphasis on private savings… emerging economies have relatively weak asset markets, [and so] their citizens seek safe haven in advanced-country government bonds…. My best guess is that when global uncertainty fades and global growth picks up, global interest rates will start to rise, too. But predicting the timing of this transition is difficult. The puzzle of the global savings glut may live on for several years to come.

Am I being stupid in seeing the current euthanasia of the risk-averse rentier as a result not of an over-ample supply of savings--in this world capital still looks very scarce and very productive if you are willing to accept the risks that come with its ownership--but of a catastrophic market failure in the inability of financial markets to properly mobilize the risk-bearing capacities of society as a whole?

Ryan Avent:

Interest rates: The bottleneck: Combine banks impaired by crises with new financial regulations and you get a break-down in credit intermediation between savers and firms and households that would love to borrow…. [L]ow mortgage rates are useless to many households given the significant tightening in lending standards over the past half decade. This story suggests that whenever a crack appears in the dam standing between savers and borrowers, credit should blast through at high pressure. And to some extent that's what we observe. It also means that the incentive to create new financial innovations to bridge the gap (or pierce the dam, whichever metaphor we're running with) is extraordinarily high….

I guess the easy way to capture the world today is to say there are lots of people who know what they'd do with some money but can't get it and others with plenty of money who aren't sure what to do with it. I don't know how that ends. But if interest rates don't clear the market, I'd wager the pressure for redistribution from the one to the other may grow.