Friday, March 18, 2005

World savings glut or US profligacy?

Fed Governor Ben Bernanke wants to blame savers in developing countries for our current account deficit. You could make up a story that money flows into the US from the periphery because of our greater transparency (relative to developing economies), higher growth rates (relative to developed economies), etc. Perhaps savings rates (in excess of 40%) are too high in China, and structural reforms not far enough along to allow all of that capital can be efficiently invested locally.

For example, if you were a wealthy businessman in India or China, where would you invest your profits? Perhaps treasuries are still an attractive investment, all things considered. However, in this scenario, where demand for US assets is driven by fundamentals and not Asian central bank or FX policies, I can't imagine markets being so jittery about a possible collapse of the dollar.

Economist: "Mr Bernanke's opinion was bolder. Contrary to popular belief, he argued, the current-account deficit was not primarily “made in the USA”. It had less to do with American actions—whether the big budget deficit or low household saving—than with a “global saving glut” created largely by emerging economies. In 1996, he points out, the developing world was a net borrower, running a joint current-account deficit of over $87 billion. But after a string of financial crises, it became a big net lender. By 2003, the developing world was running a surplus of $205 billion.

This glut of saving, he points out, must be offset by a dearth elsewhere. In other words, the poor world's determination to live well within its means has forced America to live well beyond its own. America's current-account deficit, Mr Bernanke argues, is the “tail of the dog.”

Innocent of causing the current-account deficit, America's policymakers can also do little to resolve it, Mr Bernanke suggests. He cited a recent Fed study, which reckons that cutting America's budget gap by a dollar would knock less than 20 cents off the trade gap.

This may play well in the White House (no small concern for Mr Bernanke, who is keen to succeed Mr Greenspan when the chairman retires next January). But it downplays America's responsibility for its fate. After all, the two biggest global policy shifts in recent years—the White House's move from budget surplus to deficit and the Federal Reserve's decision to slash short-term interest rates—were both emphatically made in America. Both helped prop up the global economy, but they also aggravated external imbalances.

Mr Bernanke insists that cutting the budget deficit is worth doing for its own sake. His boss, Mr Greenspan, preaches fiscal virtue at every opportunity. But by suggesting that budgetary restraint may not do much to help the current account, Mr Bernanke's logic risks undermining what little enthusiasm Washington's politicians now have for fiscal discipline. Central bankers are paid to worry. Perhaps America's need to worry a little more."

7 comments:

Anonymous said...

I've considered the main problem to be an excess of foreign savings for a while now. If people are borrowing a lot and saving very little, interests rates will go up. The fact that they are just beginning to come out of historic lows suggest that recent savings rates have been at historic highs (relative to borrowing rates).

In the current interest rate environment, the rational thing to do is to borrow money. I currently have about $20k in loans and my income is about $25k/year. The interest on all my loans for last year was about $300. I could work on repaying my loans faster, but it doesn't make any sense to because they are fixed rate loans (consolidated student loans), so their interest rates will not increase with time. I am still getting credit card balance transfer offers with fixed 1.99% interest rates until the balance is repaid. I can transfer a balance to myself and put it into a money market account at 3.25% and likely to increase. So long as borrowing costs are kept down by foreign lending, why wouldn't I borrow as much as people will let me?

Anonymous said...

I've considered the main problem to be an excess of foreign savings for a while now. If people are borrowing a lot and saving very little, interests rates will go up. The fact that they are just beginning to come out of historic lows suggest that recent savings rates have been at historic highs (relative to borrowing rates).

In the current interest rate environment, the rational thing to do is to borrow money. I currently have about $20k in loans and my income is about $25k/year. The interest on all my loans for last year was about $300. I could work on repaying my loans faster, but it doesn't make any sense to because they are fixed rate loans (consolidated student loans), so their interest rates will not increase with time. I am still getting credit card balance transfer offers with fixed 1.99% interest rates until the balance is repaid. I can transfer a balance to myself and put it into a money market account at 3.25% and likely to increase. So long as borrowing costs are kept down by foreign lending, why wouldn't I borrow as much as people will let me?

Anonymous said...

We both know our lovely international students. Among those from wealthier families, I am struck by the American investments that are made by the families. Real estate appears to be the prime investment, but liquid assets are always held.

Anne

Anonymous said...

http://www.federalreserve.gov/boarddocs/speeches/2005/20050310/default.htm

http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm

Here are the links to Alan Greenspan's and Ben Bernanke's speeches.

Anne

Anonymous said...

Why does it appear that small value stocks and international value stocks have such significant edges over growth stocks for decades? There is no regression to the mean. I will expand on this, but any thoughts assuming I know what I am finding?

Anne

Anonymous said...

http://www.nytimes.com/2005/03/19/international/asia/19mekong.html?pagewanted=all&position=

In Life on the Mekong, China's Dams Dominate
By JANE PERLEZ

CHIANG KHONG, Thailand - For countless generations, fishermen along the Mekong River have passed their lore and way of life from father to son: the rhythms of the water, the habits of the many kinds of fish, the best nets and traps to use to survive and prosper.

But Sri Sumwantha, 70, one of the old men of Asia's majestic river, has left his delicate pirogue tied up at the riverbank for longer stretches than usual. Through green bamboo stands, he has watched the caramel-colored current slow and surge unpredictably and his catch diminish. Now, he worries how much longer his family can live off the river.

The reason is China. China's ravenous appetite for hydroelectric power at home and its thrust southward into Southeast Asia in search of trade is changing the very character of the Mekong. This is true not only in China itself, but also for the five nations and 60 million rural people downstream for whom the great river serves as their life's blood.

Several hundred miles upstream from Sri Sumwantha's simple home, China has completed two dams. It is pushing ahead with three more and has three others on the drawing board. Just about 70 miles away from here, China has blasted reefs and rocks at the border of Laos and Myanmar to clear the way for its trading vessels to reach new markets deep into Laos.

The effects of the river projects that serve China's colossal upstream ambitions have been visible for several years, but are growing more worrying, say conservationists and those who live on the river.

The fish species found in this stretch of the Mekong in northern Thailand dwindled from 100 to only 88 last year, said Sayan Khamnueng, a researcher with the Southeast Asia River Network, an environmental group.

Water levels and temperatures have fluctuated widely, threatening the river environment and disrupting the livelihoods of the fishermen and others who depend on the $2 billion annual catch of migratory fish....

Anne

Anonymous said...

http://www.nytimes.com/2005/03/19/business/worldbusiness/19indo.html?pagewanted=all&position=

Oil Wealth Wasting Away in Indonesia
By KEITH BRADSHER

BALONGAN, Indonesia - Roaring all day from the top of a chimney at a state-owned refinery here, a 30-foot-high roiling column of orange flames spewed vast clouds of black smoke visible for miles around. A 12-year-old compressor had broken down, refinery officials explained, and huge quantities of valuable propylene were being burned off for safety reasons.

Indonesia's oil industry, like the refinery, has been burning money for years, squandering the nation's mineral wealth through underinvestment, bureaucracy, corruption and a wariness of multinational companies.

So few new wells have been drilled in the last decade that annual production has dropped by more than a third. And the draining of existing fields has brought Indonesia, one of the oldest members of the Organization of the Petroleum Exporting Countries, to the ignominy of having to import oil in the last four months of 2004.

As OPEC struggles with how to respond to oil prices rising above $56 a barrel, Indonesia's failure is more than just a tragedy for a poor developing country that has failed to take advantage of a potential windfall. As OPEC's only Asian member, Indonesia should be ideally positioned to meet soaring demand from China and the rest of Asia.

Instead, its increasingly meager output has forced officials in Beijing and other Asian capitals to look farther afield, relying more on pariah states like Sudan and bringing more oil through the Strait of Malacca, where pirates have been preying on tankers and where governments worry increasingly about possible terrorist attacks. Now, Indonesian officials say they are determined to make their country an exporter again. They have raised prices and cut subsidies for gasoline and diesel to discourage waste. They have passed new laws and tax policies to encourage multinational companies to invest....

Anne

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