the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment. In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could investment more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”
But this is not precisely the same as Bernanke's global savings glut – even if Brad tried to equate them as a follow-up to a comment. World savings and investment averaged 22.4% of world GDP over the 1986 to 2001 period. For the 2002 to 2004 period, world savings and investment dipped below 22.4% of GDP. Recently, world savings and investment relative to GDP have increased. If we look at savings and investment as a percent of GDP for the advanced nations, we see a decline in both – especially savings. The bottom line seems to be that the emerging and developing economies have been net lenders, while the advanced economies have been net borrowers with the U.S. leading the way in running current account deficits.
I don’t think it entirely implausible that savings rates in both Asia and the Middle East might start to converge toward their long-term average. What goes up sometimes also comes down. An end to the emerging world’s savings glut would not be such a bad thing either. It would mean than the young and poor were supporting global demand growth – not the old and rich.
In other words, world consumption demand is likely to rise as Asia and the Middle East start to consume more. If Brad’s prediction is borne out, it will likely have two effects. One is that interest rates will rise unless we undergo another world investment decline. The second is that the U.S. will likely see more exports and hence a lower current account deficit.