the idea of a global savings glut to explain why the United States ran persistent current-account deficits. Departing from much of the academic thinking of the 1980s and 1990s, he argued that excess savings outside the US made interest rates – particularly long-term rates – lower than they otherwise would be.
Ben Bernanke argued that excess savings outside the US made interest rates – particularly long-term rates – lower than they otherwise would be.Bernanke’s thesis became quite fashionable in international monetary circles at the time. And it gained even wider currency after the 2008 financial crisis, when inflation was persistently low and US current-account deficits continued.
First, a country’s balance of payments is an accounting identity comprising the current account and the capital account. The current account is determined by the domestic saving-investment balance.A country that saves more than it invests will have excess savings and a current-account surplus, and vice versa, just as a country that imports more than it exports will have a trade deficit. But it does not follow that the capital account necessarily dictates what happens to the current account.
Beyond these issues, I have never quite understood why advocates of the savings-glut idea were not challenged more when China started reducing its own massive. If pushed, they probably would have said that the change was offset by bigger surpluses elsewhere, such as in the post-crisis eurozone and on the books of companies that had been hoarding cash for fear of a rerun of 2008.
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