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."