By Robert J. Samuelson
Wednesday, April 27, 2005
We are all taught that saving is good -- indeed, Americans are often chided for spending too much and saving too little. But what if the problem of today's global economy is that people elsewhere -- in Europe, Asia and Latin America -- are saving too much and spending too little? Former Princeton University economist Ben Bernanke argues that this is precisely the case. He calls it "the global savings glut."
The power of a good idea is that it dispels common confusions. Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery (now 3 1/2 years old); and (c) the difficulty of doing anything about (a) and (b).
As a rule, saving is good. It helps individuals afford big-ticket items (a home, college tuition), protect against emergencies and prepare for retirement. For societies, it provides funds for productive investments in new factories, technologies and businesses.
In economics textbooks, a country's savings usually stay within its borders. Americans save in America, Germans in Germany. Also, savings automatically balance with new investment, mainly through interest rates and stock prices. If, for example, people want to save more than businesses want to invest, interest rates should drop. That should encourage investment and discourage saving.
Unfortunately, the real world no longer mirrors the textbooks. In the 1970s and '80s, most countries dismantled the "capital controls" that restricted their citizens from shifting funds into foreign stocks, bonds and companies. In practice, banks, insurance companies, mutual funds and governments -- the repositories of nations' savings -- do much of this global shifting. The amounts are huge: In 2003, the French had $3.3 trillion in savings abroad, the International Monetary Fund estimates. No longer do saving and investment automatically balance within a country. For example: In 2004, the Japanese saved 28 percent of their national income and invested only 24 percent at home. The rest went abroad, much of it to the United States. Most Asian countries, including China, are high savers.
Generally, the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke -- a member of the Federal Reserve Board and nominated as head of the White House Council of Economic Advisers -- has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier -- because their stock portfolios had fattened -- Americans decided they could save less and shop more.
Something similar has happened in recent years, except through the housing market. Foreign funds poured into U.S. bonds and mortgages, keeping interest rates down. Low interest rates on mortgages increase housing demand and prices, making Americans (again) feel wealthier. People borrow against the inflated values of their homes. That reduces U.S. saving and increases consumption.
Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result, because our strong spending sucks in imports, while foreigners' weak spending hurts our exports. Japan, Canada and the "euro area" -- all with savings surpluses -- buy about 45 percent of U.S. exports. In addition, converting foreign currencies into American dollars to invest here boosts the dollar's exchange rate, making U.S. exports less competitive on global markets.
What we have here is a giant and unplanned recycling mechanism. Up to a point, everyone benefits. Americans get cheap imports that hold down inflation; foreigners get a boost to their economies. But we have probably passed that point, and this global recycling could unravel in many ways. Foreigners may tire of investing in the United States; the dollar may drop on foreign exchange markets, as it already has against some currencies. But if countries with savings surpluses didn't consume or invest more at home, world growth would suffer. Or the U.S. recovery could falter. Trade deficits certainly help explain its precariousness. There's a constant drag on job creation, as rising imports divert production abroad.
Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States. To say a country has surplus saving is simply another way of saying that it lacks good investment opportunities at home or discourages its citizens from consuming. Asian countries favor export-led growth, deemphasizing local consumption. Latin America's volatile politics deter investment. Europe's heavy taxes and regulations do likewise.
Whatever the problems, Americans can't fix them. The common view that our budget deficits (which Bernanke correctly thinks should be reduced) cause our trade deficits is simply wrong. The two are only loosely connected. That unconventional conclusion is also inconvenient, because it measures our powerlessness.