Ben “Helipcopter” Bernanke, the same Fed Governor who has threatened to drop bales of freshly printed money from a helicopter in a last-ditch effort to fight deflation, speaking to the Virginia Association of Economics, recently state:
I will take issue with the common view that the recent deterioration in the U.S. current account primarily reflects economic policies and other economic developments within the United States itself.
I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.
The major problem with Bernanke’s speech is that he confuses atucal savings — the sacrifice of present consumption for future consumption — with money printing. Bernanke states:
- By the same token, if a country’s saving is less than the amount required to finance domestic investment, the country can close the gap by borrowing from abroad. In the United States, national saving is currently quite low and falls considerably short of U.S. capital investment. Of necessity, this shortfall is made up by net foreign borrowing–essentially, by making use of foreigners’ saving to finance part of domestic investment.
The foreign dollar-buying cartel cannot borrow enough savings in their domestic economies to purchase all of the dollar-denominated debt that they wish to absorb. This has been amply document by Richard Duncan, Nouriel Roubini, and others (see this paper from the Financial Markets center, who cite The Economist Magazine on their web site to the effect that central banks “may have created the biggest liquidity bubble in history.”). The difference has been made up by money printing. In China in particular, this is driving a massive credit boom, which must eventually turn into a bust. To give him credit, he does make this point a bit later:
- In practice, these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets. Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.
- That inadequate U.S. national saving is the source of the current account deficit must be true at some level; indeed, the statement is almost a tautology. However, linking current-account developments to the decline in saving begs the question of why U.S. saving has declined.
Says Bernanke, “the rapid increase in household wealth and expectations of future income gains reduced U.S. residents’ perceived need to save.” The incentive to actually save is diminished, while American no longer see the need to save when their stocks were up 20-50% annually during the 90s and their house is up 20% annually for the last few years. Don’t look too far, but the blame has a lot to do with the Fed’s policy of easy money and credit expansion which has been leading to asset price inflation Besides lowering interest rates, speculative bubbles have been blowing up in housing and stocks.
To begin, the idea of excessive savings is an absurdity. Savings are the only means of funding the accumulation of capital, the only path to an increased standard of living in the future. Here he seems to be acknowledging the destructive effects of the housing bubble and the linkage to US foreign borrowing:
- Because investment by businesses in equipment and structures has been relatively low in recent years (for cyclical and other reasons) and because the tax and financial systems in the United States and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. However, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be.