Sunday, April 13, 2008

Savings Glut or Investment Deficiency?

Brad Setser points us to table A.16 of the IMF's latest WEO and notes:
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.

Brad continues:
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.

8 comments:

rosserjb@jmu.edu said...

Well, US exports have been soaring, the one major trend offsetting the current descent into recession by the US economy.

Barkley

ProGrowthLiberal said...

Brad S. leaves a follow-up over at his blog as to how he reads what Bernanke was trying to say. Worth the read as I think Brad gets it about right.

Shag from Brookline said...

Does a savings glut possibly result because the savers are being paid too well and/or because they work so hard they don't have time to spend it? When these savers savor more worldly goods, do they go on spending sprees? If too many people are savers, is that good or bad for the economy of a nation-state or internationally? Is there an appropriate balance between saving and consuming? When the dollar goes down, this benefits exports but not imports. When the dollar rises, foreign travel and imports are cheaper but exports weaken. With the dollar, it is back and forth. Is it the same with saving versus consuming?

Peter Dorman said...

I left a comment on his blog that Brad misinterpreted as a criticism of him. It's not: he has been the oracle for wisdom on sovereign capital flows. My point is that the savings/investment balances are simply accounting identities and say nothing about the direction of causation. I see the global pattern as largely the *result* of global imbalances and only secondarily as causal in the form of differential household consumption/savings preferences.

Eleanor said...

How does one distinguish a savings glut from an investment drought? It would seem to me it's the same thing seen from different angles. I have been assuming that the insane financial bubbles of the last two decades have been due partly to the shift of income up, which produces more money for investment, and partly to a lack of sane capital investment opportunities.

john c. halasz said...

Yes, by one account the U.S. has a gini of 44, by another of 47, the same as Red China's! Both the excess of savings and the dearth of investment demand are not independent of income distribution, for the reason put in its bluntest, simplest form by Kaliecki's dictum: "workers spend what they get; capitalists get what they spend". Low wages and lack of consumption demand to spur investment go together with an apparant rise in savings and an inflation of financial assets.

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