Savings Glut Research Articles

The Great Depression as a Savings Glut

New data covering 23 countries reveal that banking crises of the Great Depression coincided with a sharp international increase in deposits at savings institutions and life insurance. Deposits fled from commercial banks to alternative forms of savings. This fueled a credit crunch since other institutions did not replace bank lending. While asset prices fell, savings held in savings institutions and life insurance companies increased as a share of GDP and in real terms. These findings provide new explanations for the fall in credit and aggregate demand in the 1930s. They illustrate the need to consider nonbank financial institutions when studying banking crises.

From the Saving Glut to Financial Instability: Evidence from the Silicon Valley Bank Failure

From the Saving Glut to Financial Instability: Evidence from the Silicon Valley Bank Failure

The global savings glut and the housing boom

The U.S. housing boom from 2000 to 2006 consisted of two fundamentally different phases. An increase in foreign credit supply (a savings glut) can explain the initial countercyclical run-up in house prices from 2000 through 2002, whereas an increase in domestic credit demand –driven by a relaxation of domestic credit standards– can explain the subsequent procyclical boom phase from 2003 to 2006. A tightening of domestic credit standards can fully explain the bust from 2007 to 2010. I base these conclusions on a quantitative open economy model with housing and collateralized foreign debt. Countercyclical government spending financed by a lump sum tax stabilizes house prices, output and domestic inflation over the entire boom period, pushes the economy away from the zero lower bound, and raises domestic utility.

Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut

ABSTRACTThis paper explores the connection between rising intangible capital and the secular upward trend in U.S. corporate cash holdings. We calibrate a dynamic model with two productive assets—tangible and intangible capital—in which only tangible capital can serve as collateral. We highlight the following points: (i) a shift toward intangible capital shrinks firms' debt capacity and leads them to hold more cash, (ii) the effect accounts for three‐quarters of the observed trend in average cash ratios, and (iii) it also accounts for the upward trend of cash ratios in the cross‐section of small and large firms and in the aggregate.

OECD countries’ twin long-run challenge: The impact of aging dynamics and increasing natural disasters on savings ratios

AbstractThere has been a long-standing debate over the development of savings rates in developed economies, and an emphasis has been placed on aging societies and a global savings glut. Meanwhile, with rising global temperatures and more frequent extreme weather events becoming an increasingly visible economic and ecological global challenge, the concern of climate-related risks could indeed be an important issue in monetary and real economic analysis. This study aims to investigate the dual long-term challenge of sustainable economic development. By constructing an enhanced growth model and investigating empirically, using a panel approach which employs data from OECD countries between 1980 and 2020, the question as to the extent to which the savings rate is affected by aging populations and environmental degradation will be addressed in a broad macro perspective. This study explores for the first time the impact of natural disasters on OECD countries and the main findings indicate that aging populations and natural disasters have significant negative impacts on savings rates. Moreover, the analyses using sub-samples suggest a diminishing role of the real long-term interest rate regarding savings behaviour.

The Anatomy of the Global Saving Glut

The Anatomy of the Global Saving Glut

Глобальные дисбалансы: эволюция подходов

The article examines the current state and causes of global imbalances’ sustainability – the phenomenon whereby some major systemic countries run large and persistent current account deficits, which are mirrored by large surpluses in a number of other countries. The widening of global imbalances during COVID 19 pandemic contrasts with their dynamics during previous global downturns, when the scale of imbalances narrowed. The article analyzes various explanations of global imbalances: intertemporal choice with a difference in the rates of return, demographic changes, global savings glut, dynamics of oil prices, exchange rate manipulations, twin deficits, demand for safe assets. The significance of each of the causes of global imbalances changes over time, and currently fiscal policy has been playing an increasing role to determine the movements of current account deficits. The global fiscal response to the pandemic, especially in advanced economies, has been unprecedented, which led to significant reduction in government savings. The scale and dynamics of global imbalances are largely determined by the state of the US balance of payments: it is a reflection of the ability to generate safe assets and to finance trade and budget deficits cheaply by using the dollar’s status as the dominant world currency. There are differences in theoretical approaches regarding the macroeconomic effects of global imbalances. But persistent current account deficits and surpluses lead to accumulation of stock imbalances – the difference between countries’ foreign assets and liabilities. The ongoing negative changes in the net international investment positions of many leading advanced economies indicate an increase in external indebtedness. This creates risks to both debtor and creditor countries and threatens the stability of the global financial system.

The Anatomy of the Global Saving Glut

The Anatomy of the Global Saving Glut

The Savings Glut of the Old: Population Aging, the Risk Premium, and the Murder-Suicide of the Rentier

The Savings Glut of the Old: Population Aging, the Risk Premium, and the Murder-Suicide of the Rentier

Four themes that will shape markets in the months ahead

▪ Four key themes are set to dominate markets in the coming months: a volatile recovery path; a reversion to “secular stagnation‐light”; abundant liquidity that is supporting asset valuations; and rising political risks. ▪ Differing Covid containment strategies and disruption to supply chains mean the path to full recovery will be bumpy – rising and falling as shifting supply constraints and restrictions impede demand. ▪ Our view that the world remains mired in a savings glut has not changed since the pandemic. Indeed, the pandemic has only exacerbated the need for policymakers to drive growth. Beyond the run‐down of households’ excess savings, economic growth will revert to a grinding pace in 2023. ▪ In the near term, excess savings will support high asset price valuations. Limited room for multiple expansion will dampen returns but barring a wider downturn the risk of a significant correction in prices is, in our view, low. ▪ Geopolitical risk in the form of populist policies will remain high in advanced economies and emerging markets, fed by depressed living standards and the need to withdraw public sector support to deal with mounting debt.

Is zero the safe real rate?

The current economic debate with regards to the secular trend of ever lower, even negative, safe real interest rates is dominated by Keynesian, neoclassical and Austrian explanations. The former (two) argue that the interdependence phenomena of a global savings glut and a secular stagnation cause an oversupply of savings and thus drive down rates. From this position, central bank merely react to market forces. The latter dissent and argue that it was rather the other way around and an asymmetric central bank policy aimed at propping up equity prices led to the secular stagnation now quoted for its justification. In contrast, from the perspective of a critique of ideology, safe real rates where neither driven down by market forces nor central banks but by the weight of being not reasonably safe but riskless. Specifically, I argue that by equating the riskless return with the short-term interest rate, Black and Scholes (1973) state a tautology and imply that both rates shall be zero. In the subsequent inquiry, I show that this argument allows for a neat narration of the economic history of the neoliberal age. Furthermore, I explain why under current conditions ultra low interest rates fail to translate into inflation.

Why a new inflation era, not a regime shift, is likely

▪ A shift to a new policy regime with much higher and more volatile inflation is a possibility that can't be ignored due to its impact on the economy and financial markets. But in our view, if the pandemic triggers lasting effects on the inflation‐generation process, a more plausible outcome is a new era of slightly higher inflation within the current central bank inflation targeting regime. ▪ Two distinct eras have characterised the broad inflation targeting policy regime of the past 25 to 30 years. Before the global financial crisis, CPI inflation typically averaged just above 2% in most advanced economies, and central bank policy rates went up as well as down. In the post GFC era, inflation has been lower and less volatile, despite ultra‐accommodative monetary policy. ▪ The shift in eras reflected two broad developments. First, factors such as a savings glut, austerity, and a lack of conventional monetary policy space created a period of deficient demand, dampening inflationary pressures. ▪ Second, other developments weakened the upward push on inflation from stronger activity in the domestic economy. Central banks' previous successes in anchoring inflation reduced expectations of higher inflation during bursts of demand. Globalisation and automation also helped to lessen cost pressures, while labour market development helped to keep wage pressures contained. ▪ Many of these inflation‐taming factors are still firmly in place. But others have either lessened or even reversed, albeit perhaps only temporarily (Figure 1). This suggest a new era could have begun in which central banks may find it easier to meet their inflation targets. We think well‐anchored, but somewhat higher and more volatile, inflation is likely, and in due course will prompt a modest normalisation of policy rates.

Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy?

This article compares the Keynesian, neoclassical and Austrian expla-nations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective, low interest rates are attributed to aging societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were decreased step by step by central banks to stimulate growth. This paralyzed investment and lowered growth in the long term. This study shows that the ability of banks to extend credit ex nihilo and the requirement of time to produce capital goods invalidates the permanent IS identity assumed in the Keynesian theory. Furthermore, it is found that there is no empirical evidence for the hypotheses of a global savings glut and secular stagnation. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.

Globalization, Trade Imbalances and Labor Market Adjustment

<ns2:p>We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the "China Shock" through the lens of our model. We show that the US enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.</ns2:p>

The Corporate Saving Glut and the Current Account in Germany

We investigate, in the case of Germany, the positive correlation between the cyclical components of the corporate saving glut in the non-financial corporate sector and the current account surplus from a capital account perspective. Employing sign restrictions, our findings suggest that mostly labor supply, world demand and financial friction shocks account for the joint dynamics of excess corporate saving and the current account surplus. Household saving shocks, by contrast, cannot explain the correlation. We conclude that, explained through these factors, the corporate saving glut is an important driver of the cyclical component of the current account. JEL Classification: E32, F32, F45

Natural Interest Rate and Money Interest Rates

Abstract The long lasting period of declining interest rates raises the question, whether the latter result from a savings glut, from a money glut, or from both. Moreover, it renewed the old question how the natural interest rate should be sensibly defined, and if it could ever fall below the growth rate, thereby causing dynamic inefficiency. The present article contributes to this debate on a pure theoretical base, leaving the empirical issue for other research. In particular, I briefly discuss Böhm-Bawerk’s three causes for the existence of an interest rate in a private barter economy. I argue that the natural interest rate remains a meaningful concept even in an economy with both a public sector and money. From a welfare economic view, it is also preferable above the so-called golden rule, provided the interest rate does not fall below the growth rate. Although the natural interest rate could well get negative by excess saving in principle, this is normally prevented when durable goods like land or precious metals are available for storing private wealth. On the other hand, issuing credit money tends to push the interest rate below its natural level, even in the long run. In order to prevent this, one could either replace it by neutral helicopter money or return to a gold currency.

Systemic Debt Crises in International Disequilibrium System

Global Savings Glut (GSG) hypothesis has become the predominant and official theory attempted to explain the global financial crisis of 2008 and the Great Recession of 2008 – 2009. “… it is impossible to understand this crisis without reference to the global imbalances” (Bernanke, 2009). Any possible “global imbalance” must be connected to the international terms of trade and international exchange rate mechanism. GSG theory argues that the overwhelming credit (debt) growth occurred in the U.S. prior 2008, was due to savings made by certain trading partners, which resulted for the U.S. to have a persistent Current Account deficit and prevented the ability to increase interest rates by the U.S. monetary authorities to reduce current account deficit, as significant capital inflows from those countries took place. Yet, the paper observes that debt crises take place in countries where there are Current Account surpluses. This conundrum needs to be examined. Hence, the paper finds that another empirically verifiable proposition could possibly be used to explain the systemic debt crises better.

Germany and China Have Savings Gluts, the USA Is a Sump: So What?

A “global saving glut” was invented by Ben Bernanke in 2005 as a label for positive net lending (imports exceeding exports) to the American economy by the rest of the world. This trading situation had already emerged around 1980 and led to the Plaza Accord in 1985. One common explanation is based on the Mundell–Fleming IS/LM/BP model. But this model cannot be valid, since the “BP” equation is not independent of “IS.” Other champions of this saving glut hypothesis rely on loanable funds theory, which is institutionally inadequate. More plausible analyses of the persistent trade imbalance can be derived from a two-country IS/LM set-up devised by Wynne Godley, a Kaleckian description of the political economy of East Asia and the United States, and dissection of the terms of trade due to W. Arthur Lewis and Luigi Pasinetti.

Financial Integration, Savings Gluts, and Asset Price Booms

AbstractCapital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

Germany and China Have Savings Gluts, the USA Is a Sump: So What?

A “global saving glut” was invented by Ben Bernanke in 2005 as a label for positive net lending (imports exceeding exports) to the American economy by the rest of the world. This trading situation had already emerged around 1980, and led to the Plaza Accord in 1985. One common explanation is based on the Mundell-Fleming IS/LM/BP model. But this model cannot be valid, since the “BP” equation is not independent of “IS.” Other champions of this saving glut hypothesis rely on loanable funds theory, which is institutionally inadequate. More plausible analyses of the persistent trade imbalance can be derived from a two-country IS/LM set-up devised by Wynne Godley, a Kaleckian description of the political economy of East Asia and the United States, and dissection of the terms of trade due to W. Arthur Lewis and Luigi Pasinetti.