Talk:Global saving glut

How can Niall Ferguson predicts a financial crisis in 2008 that had already started in the summer of 2007?

Niclas 11:28, 9 April 2010 (UTC) —Preceding unsigned comment added by Niclas M. (talk • contribs)

IMF and International Monetary Fund

Although the hypothesis of excess cash holdings or cash hoarding has been used by the IMF, Organisation for Economic Co-operation and Development (OECD), International Monetary Fund-- in the third paragraph lists the IMF and the International Monetary Fund, they're the same organization so I believe that one of the two can be removed. Bucknastay (talk) 09:12, 29 September 2013 (UTC)

Done -- Derek Ross | Talk 23:25, 5 December 2013 (UTC)

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Dr. Schnabl's comment on this article

Dr. Schnabl has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Global Savings Glut Wikipedia

The Savings Glut hypothesis was first formulated by Ben Bernanke to explain (/ to justify?) the growing US current account deficit based on factors located outside the US: „A global saving glut (...) helps to explain both the increase in the US current account deficit and the the relatively low level of long-term real interest rates in the world today.“

Bernanke mentions three main reasons for the global Savings glut:

(1) Ageing Populations “One well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers.”

(2) High Capital-Labor Ratios Due to high capital-labor ratios “many advanced countries outside the United States (…) face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad.

(3) Methmorphosis of the Developing World into a Net Supplier of Funds „the bulk of the increase in the U.S. current account deficit was balanced by changes in the current account positions of developing countries, which moved from a collective deficit of $88 billion to a surplus of $205 billion--a net change of $293 billion-- between 1996 and 2003.“

Bernanke (2005) acknowledges that the last argument is from an empirical point of view much more important to explain the US current account deficit than the combination of the upper two. He mentions three arguments why emerging have changed their behavior towards net capital exports and thereby current account surplues:

• In response to financial market crises, emerging markets felt urged to accumulate foreign reserves as war chests against possible future capital outflows and crisis. • Countries pursue export-led growth via preventing currency appreciation because domestic demand is thought to be insufficient to employ fully domestic resources. • Another factor mentioned is the (exogenous?) increase of oil (and raw material) prices.

„Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets. A related strategy has focused on reducing the burden of external debt by attempting to pay down those obligations, with the funds coming from a combination of reduced fiscal deficits and increased domestic debt issuance.“

Bernanke (2005) explains why this strategy in his eyes has generated a US current account deficit:

„The current account positions of the industrial countries adjusted endogenously to these changes in financial market conditions. I will focus here on the case of the United States, which bore the bulk of the adjustment. From the trade perspective, higher stock-market wealth increased the willingness of U.S. consumers to spend on goods and services, including large quantities of imports, while the strong dollar made U.S. imports cheap (in terms of dollars) and exports expensive (in terms of foreign currencies), creating a rising trade imbalance.“

Bernanke (2005) also derives a declining real interest rate from his concept:

„After the stock-market decline that began in March 2000, new capital investment and thus the demand for financing waned around the world. Yet desired global saving remained strong. The textbook analysis suggests that, with desired saving outstripping desired investment, the real rate of interest should fall to equilibrate the market for global saving. Indeed, real interest rates have been relatively low in recent years, not only in the United States but also abroad. From a narrow U.S. perspective, these low long-term rates are puzzling; from a global perspective, they may be less so.“

Bernanke (2005) argues that the US is a particular attractive goal of capital inflows because of „depht of sophistication of the country’s financial markets“ and the status of the dollar as leading international reserve currency and anchor of exchange rate stabilization.

Recommendation for Revising the Wikipedia-Article

Because Bernanke (2005) has created the savings-glut hypothesis, the Wikipedia article should centered around Bernanke’s savings glut hypothesis and could contain the following four parts.

(1) Theoretical Framework and Empirical Motivation

Here a short section should say, that after the turn of the millennium global current account surpluses and deficits have substantially increased (see e.g. Bernanke (2005) or Belke and Schnabl 2013). It should be stressed that in net terms current account positions are equal to net capital flows with inversed sign. Furthermore the current section „net borrowing and net lending“ can come here.

(2) The Main Arguments of Bernanke (2005) as a Framework

As the global savings glut hypothesis was formulated by Bernanke (2005) his main arguments – for instance as summarised above – should be listed here. (All other parts should could be excluded or shortened substantially, in particular the sections on Canada, as Canada is not a central player in global imbalances.)

(3) Counterarguments against the Savings Glut Hypothesis

Here the argument by Hans-Werner Sinn could be mentioned.

Hyun Song Shin (2011), head of research of the Bank for International Settlements argued that Bernanke (2005) may point the wrong way. He argues that a “global banking glut may have been more culpable for the crisis than the ‘global savings glut’. He argues that in Europe a hike of cross-border lending in response to euro introduction caused buoyant capital inflows and unsustainable credit growth in the Southern European countries and Ireland. He also stresses the important role of European banks for credit conditions in the US in the run-up to the subprime crisis.

It is important to acknowledge that Bernanke does not mention at all the monetary policy of the US Fed as a possible driver of the global savings glut. McKinnon and Schnabl (2012) replicate Bernanke’s (2005) global savings glut hypothesis but assume US monetary policy to be exogenous (due to its status as central bank in the core of the international monetary system) and show an inversed direction of causality.

In detail:

• In response to the bursting dotcom bubble (2000) the Federal Reserve strongly cut interest rates to stabilize financial markets. • This led to capital outflows into many emerging market economies. These countries have traditionally a strong incentive to stabilize exchange rates because goods and capital markets are underdeveloped. Therefore, exchange rate stabilization has been traditionally a tool of macroeconomic stabilization. • Given strong capital inflows the emerging market economies were forced to accumulate large amounts of dollars. • If unsterilized, dollar accumulation by central banks is equivalent to a monetary expansion, which had been in past been the source of unsustainable credit growth and crisis in many emerging market economies (for instance the Southeast Asian countries prior to the Asian crisis). • Therefore, many East Asian countries sterilized the monetary effects of foreign reserve accumulation mainly by increasing reserve requirements. • The sterilization operations are equivalent to a credit tightening and thereby a drag on domestic investment. The consequence is growing surpluses of savings over investments and therefore growing current account surpluses.

One may also want to mention that post-2001 US monetary expansion encouraged speculation in commodity markets (see Masters 2008). The resulting dramatic increases in commodity prices (starting in 2001, ending in 2014) generated government surpluses and current account surpluses of many raw material exporting countries. Due to their exchange rate targets these government accumulated large amounts of dollars thereby contributing to the US current account deficit.

(4) The Further Reception of the Argument:

Bernanke’s (2005) hypothesis was put by in a theoretical model of global imbalances and low interest rates by Caballero, Farhi and Gourinchas (2006). The Lucas (1990) paradox could also be mentioned as a kind of precursor of the savings glut hypothesis. (Note that in the view of McKinnon and Schnabl 2012, capital flowing from East Asia to the US is not a paradox, but simply the outcome of East Asian attempts to stabilize exchange rates and avoid unsustainable credit growth.)

References to Summers (2014) and von Weizsäcker (2014) could be made, who launched based on Bernanke (2005) their hypotheses of secular stagnation. They use (inter alia) ageing populations and high capital-labour ratios as explanations for declining real interest rates on a global level. Indirectly they justify very low interest rates set by central banks in response to the post-2007 financial and debt crises in industrialized countries as the outcome of secular stagnation. In their view the current stagnation is just a predetermined trend rather than the outcome of deliberate policy decisions.

In this context, it may be fair to refer to Hoffmann and Schnabl (2016) who argue that declining productivity increases, investment and growth are the outcomes of deliberate interest rate cuts and quantitative easing by central banks, which create adverse incentives and distorted economic structures.

A further reference could be made to the fact that in all industrialized countries including the current account surplus countries Germany and Japan, household savings rates continue to decline since the mid 1980s (together with interest rates set by central banks). Surpluses of the savings over investment are mainly driven by increasing corporate savings. Hoffmann and Schnabl (2016) argue that Increasing corporate savings can be explained by the fact that increasingly expansionary monetary policies have dramatically reduced the cost of capital for enterprises.

References:

Bernanke, Ben (2005): The Global Savings Glut and the U.S. Current Account Deficit. Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10, 2005.

Belke, Ansgar / Schnabl, Gunther (2013): Four Generations of Global Imbalances. Review of International Economics 21, 1, 1-5.

Caballero, Ricardo / Farhi, Emmanuel / Gourinchas, Pierre-Oliver (2006): An Equilibrium Model of “Global Imbalances” and Low Interest Rates. American Economic Review 98, 1, 358-393.

Hoffmann, Andreas / Schnabl, Gunther (2016): The Adverse Effects of Unconventional Monetary Policy. Cato Journal 36, 3, 1-36. Lucas, Robert (1990): Why doesn't Capital Flow from Rich to Poor Countries? American Economic Review 90, 2, 347-368. Masters, Michael (2008): Testimony before the Committee on Homeland Security and Governmental Affairs United States Senate. McKinnon, Ronald / Schnabl, Gunther (2012): China and its Dollar Exchange Rate. A Worldwide Stabilizing Influence? The World Economy 35, 6, 667-693.

Shin, Hyun Song (2011): Global Savings Glut or Global Banking Glut? Vox, CEPR’s Policy Portal, 20.12.2011.

Summers, L. (2014) U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. Business Economics 49, 2: 65–73.

Weizsäcker, Christian von (2014): Public Debt and Price Stability. German Economic Review 15, 1: 42–61.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Schnabl has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.

ExpertIdeasBot (talk) 20:23, 24 September 2016 (UTC)

Removal of section "Net borrowing must equal net lending"

This section is very interesting but too short. It must either be elaborated upon or moved under another section.

"There is no closed economy in today's world"

North Korea's economy is practically completely closed. https://en.wikipedia.org/wiki/North_Korea#Economy — Preceding unsigned comment added by 188.64.152.198 (talk) 13:51, 25 January 2017 (UTC)

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