Wednesday, September 26, 2007

Another Critique of the Saving Glut Theory

Over at Brad Sester's blog, Michael Pettis (guest blogging for Brad) is leading a discussion on whether there really has been a global saving glut. I have expressed my reservations about the use of saving glut theory to make sense of the global economic imbalances here, here, here, and here. Micheal Pettis does us favor by pointing us to an interesting Stephen Roach article. There is no direct link to the article, but I have pulled portions of it from a posting at the International Political Economy Blog.

Stephen Roach:

"There is no glut of global saving. Yes, global saving has risen steadily over the past several decades, but contrary to widespread belief, the rise in recent years has been no faster than the expansion of world GDP. In fact, the overall global saving rate stood at 22.8% of world GDP in 2006 – basically unchanged from the 23.0% reading in 1990. At the same time, there has been an important shift in the mix of global saving – away from the rich countries of the developed world toward the poor countries of the developing world. This development, rather than overall trends in global saving, is likely to remain a critical issue for the world economy and financial markets in the years ahead.

There can be no mistaking the dramatic shift in the mix of global saving in recent years. A particularly stunning change has occurred in just the past decade. According to IMF statistics, in 1996 the advanced countries of the developed world accounted for 78% of total global saving. By 2006, that share had fallen to 65%. Over the same decade, the developing world’s share of global saving has risen from 22% in 1996 to 36% in 2006. Put another way, the rich countries of the developed world – which made up 80% of world GDP in 1996 – accounted for just 43% of the cumulative increase in global saving over the past decade. By contrast, the poor countries of the developing world – which made up only 19% of world GDP in 1996 – accounted for fully 58% of the cumulative increase in global saving over the 1996 to 2006 period, or approximately three times their weight in the world economy. This wealth transfer from the poor to the rich – the exact opposite of that which occurred in the first globalization of the early 20th century – is one of the most extraordinary developments in the modern history of the global economy.

The United States, of course, stands out for extreme negligence on the saving front. By 2006, America’s gross national saving rate – the combined saving of individuals, businesses, and the government sector – stood at just 13.7%. That’s down from the 16.5% rate of a decade earlier and, by far, the lowest domestic saving rate of any major economy in the developed world. Adjusted for depreciation – a calculation which provides a proxy for the domestic saving that is left over after funding the wear and tear on aging capacity – the US net national saving rate averaged just 1% over the past three years, a record low by any standards. Over the 1996–2006 period, the US accounted for a mere 12% of the total growth in worldwide saving – less than half its 26% share in global economy as of 1996. Elsewhere in the developed world, it has been more of a mixed picture. The Japanese saving rate, while a good deal higher than that of the US, fell from 30.4% in 1996 to 28.0% in 2006. By contrast, gross saving in the Euro Area held steady at around 21.0% over the past 10 years...

The dramatic shift in the mix of global saving over the past decade is a big deal. It drives the equally unprecedented disparity between current account surpluses and deficits – the crux of the global imbalances debate. It also accounts for the gap between trade deficits and surpluses that is shaping the current protectionist debate in the US Congress. In theory, of course, this shift in the mix of saving also has the potential to shape relative asset prices between debtor and lender nations. Although those impacts have yet to take on serious proportions, I continue to suspect the risk of such a possibility is a good deal higher than that envisioned by the broad consensus of global investors.

From the start, the concept of the global saving glut was very much a US-centric vision (see the March 10, 2005, speech of then Federal Reserve Board Governor Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit”). From America’s myopic point of view, it believes it is doing the world a huge favor by consuming a slice of under-utilized saving generated largely by poor developing economies. But this is a very different phenomenon than a glut of worldwide saving that is sloshing around for the asking. The story, instead, is that of a shifting mix in the composition of global saving – and the tradeoffs associated with the alternative uses of such funds. I suspect those tradeoffs are now in the process of changing – an outcome that is likely to put downward pressure on the US dollar and upward pressure on long-term US real interest rates. If the borrower turns protectionist – one of the stranger potential twists of modern economic history – those pressures could well intensify. Don’t count on the saving glut that never was to forestall these outcomes."

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