Thursday, April 2, 2015

The Global Savngs Glut Versus Secular Stagnation

Ben Bernanke argues that a global savings glut provides a better explanation for low global interest rates and slow economic growth than the secular stagnation hypothesis.  Both of these explanations imply that the global supply of savings is greater than the level of investment.  The secular stagnation hypothesis argues that the demand for investment capital in the US will be weak over an extended period because of weak fundamentals.  For example, slow population growth, and a less capital intensive economy will produce a long term reduction in business investment demand.  The policy response to this problem is to increase the level of government investment in productive infrastructure.  The savings glut explanation argues that the entire global economy can't be in the grip of secular stagnation.  Capital should be able to flow to profitable investment opportunities where the exist.  According to Bernanke, government policies have interfered with the efficient allocation of savings to their most productive uses.  For example emerging market economies (EME) in the late 90's used their current account surpluses to acquire foreign assets to increase their reserve accounts.  This caused their currencies to decline in value and it stimulated exports.  There is a current account surplus today in the eurozone.  The level of savings exceeds the level of business investment.  That is due to a large trade surplus in Germany, but primarily due to a lack of investment in the countries damaged by recession.  That has caused the value of the euro to fall and it may stimulate EZ exports at the expense of imports from nations whose currencies have risen in value relative to the euro. 

Since government policies are the major reason for the misallocation of capital, Bernanke believes that changes in government policies should use to rebalance the allocation of savings.  That should cause interest rates to rise to a more normal level in response to an increase in investment demand.

Paul Krugman has entered into this debate. He tends to favor the secular stagnation hypothesis and the use of fiscal policy to increase aggregate demand.  His argument is a bit technical but these discussions between three top economists, which includes two high level policy officials,  touches on some of the central issues in the global economy.

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