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Timing Market Turns
Speech
Chairman Ben S. Bernanke
At the Bundesbank Lecture, Berlin,
Germany
September 11, 2007
Global Imbalances: Recent Developments and
Prospects
In a speech given in March 2005 (Bernanke, 2005), I discussed a
number of important and interrelated developments in the global
economy, including the substantial expansion of the current account
deficit in the United States, the equally impressive rise in the
current account surpluses of many emerging-market economies, and a
worldwide decline in long-term real interest rates. I argued
that these developments could be explained, in part, by the
emergence of a global saving glut, driven by the
transformation of many emerging-market economies--notably, rapidly
growing East Asian economies and oil-producing countries--from net
borrowers to large net lenders on international capital
markets. Today I will review those developments and provide
an update. I will also consider policy implications and
prospects for the future.
A principal theme of my earlier remarks was that a satisfying
explanation of the developments in the U.S. current account cannot
focus on developments within the United States alone. Rather,
understanding these developments and evaluating potential policy
responses require a global perspective. I will continue to
take that perspective in my remarks today and will emphasize in
particular how changes in desired saving and investment in any
given region, through their effects on global capital flows, may
affect saving, investment, and the external balances of other
countries around the world.
The Origins of the Global Saving Glut, 1996-2004
I will begin by reviewing the origins and development of the global
saving glut over the period 1996-2004, as discussed in my earlier
speech, and will then turn to more-recent developments.
As is well known, the U.S. current account deficit expanded
sharply in the latter part of the 1990s and the first half of the
present decade. In 1996, the U.S. deficit was $125 billion,
or 1.6 percent of U.S. gross domestic product (GDP); by 2004, it
had grown to $640 billion, or 5.5 percent of GDP.
1 National income accounting
identities imply that the current account deficit equals the excess
of domestic investment in capital goods, including housing, over
domestic saving, including the saving of households, firms, and
governments. The proximate cause of the increase in the U.S.
external deficit was a decline in U.S. saving; between 1996 and
2004, the investment rate in the United States remained almost
unchanged at about 19 percent of GDP, whereas the saving rate
declined from 16-1/2 percent to slightly less than 14 percent of
GDP.
2 Domestic investment not
funded by domestic saving must be financed by capital flows from
abroad, and, indeed, the large increase in the U.S. current account
deficit was matched by a similar expansion of net capital
inflows.
Globally, national current account deficits and surpluses must
balance out, as deficit countries can raise funds in international
capital markets only to the extent that other (surplus) countries
provide those funds. Accordingly, it is not surprising that
the widening of the U.S. current account deficit has been
associated with increased current account surpluses in the rest of
the world.
What is surprising, however, in light of historical patterns, is
that much of the increase in current account surpluses during this
period took place in developing countries rather than in the
industrial countries.
3 The table shows current
account balances for various countries and regions in selected
years. The aggregate current account balance of industrial
countries other than the United States did increase between 1996
and 2004, by a bit less than $200 billion, much of that rise being
accounted for by an increase in Japan's current account balance;
the aggregate balance of the euro area rose only slightly.
4 In comparison, the
aggregate current account position of developing countries swung
from a deficit of about $80 billion in 1996 to a surplus of roughly
$300 billion in 2004, a net move toward surplus of $380
billion.
In the aggregate, the shift from deficit to surplus in the
current account of the emerging-market world over this period
largely reflected increased saving as a share of output rather than
a decline in the rate of capital investment. However, changes
in saving and investment patterns varied by countries and
regions. For example, in the countries of developing Asia
excluding China, most of the $150 billion swing toward external
surplus between 1996 and 2004 was attributable to declines in
domestic investment. In China, rates of both saving and
investment rose, but saving rates rose more, leading to an increase
in that country's current account surplus of about $60 billion.
Outside of developing Asia, oil exporters in the Middle East and
the former Soviet Union were also important contributors to the
large increase in emerging-market current account balances.
The combined current accounts of the two regions increased
from a surplus of $20 billion in 1996 to a surplus of $162 billion
in 2004, an increase of about $140 billion. This rise largely
reflected higher saving rates, as domestic consumption fell behind
the surge in oil revenues. Among other emerging-market
economies, higher saving also accounted for an increase in the
aggregate current account balance of Latin America. Of
course, as emerging-market countries switched from being net
borrowers to being net lenders, they began to pay down their
international debts and to acquire assets of industrial
countries.
I have noted the expansion of the U.S. current account deficit
and the associated increases in current account surpluses abroad
over the 1996-2004 period. A third key development in that
period was a sustained decline in long-term real interest rates in
many parts of the world. For example, the real yield on
ten-year inflation-indexed U.S. Treasury securities averaged about
4 percent in 1999 but less than 2 percent in 2004. The
difference between the nominal long-term Treasury yield and the
trailing twelve-month rate of consumer price inflation, another
measure of the U.S. real interest rate, showed a similar pattern,
falling from about 3.5 percent in 1996 to about 1.5 percent in
2004. Similar movements were observed in other industrial
countries: In the United Kingdom, the real yields on
inflation-indexed government bonds fell from an average of 3.6
percent in 1996 to just below 2 percent in 2004; in Canada, the
analogous figures were 4.6 percent in 1996 and 2.3 percent in
2004. Real interest rates measured as the difference between
government bond yields and consumer inflation also fell in Germany,
Sweden, and Switzerland. However, in Japan, real interest
rates remained low throughout the period.
In sum, considering the 1996-2004 period, we have three facts to
explain: (1) the substantial increase in the U.S. current
account deficit, (2) the swing from moderate deficits to large
surpluses in emerging-market countries, and (3) the significant
decline in long-term real interest rates. Many observers have
focused on the expansion of the U.S. current account deficit in
isolation and have argued that it is due largely to domestic
factors, particularly declines in both public and private saving
rates. But accounting identities assure us that any movement
in the current account must involve changes in realized saving
rates relative to investment rates. The question at issue,
therefore, is whether the decline in the realized saving rate in
the United States reflected a decline in desired saving or
was instead a response to other, possibly external, economic
developments. Or, in textbook terms, did the fall in the
realized saving rate in the United States reflect a shift in the
demand for savings at any given interest rate (a shift in the
saving schedule) or a decline in savings induced by a change in the
interest rate (a movement along the saving schedule)?
In fact, there is no obvious reason why the desired saving rate
in the United States should have fallen precipitously over the
1996-2004 period.
5 Indeed, the federal budget
deficit, an oft-cited source of the decline in U.S. saving, was
actually in surplus during the 1998-2001 period even as the current
account deficit was widening. Moreover, a downward shift in
the U.S. desired saving rate, all else being equal, should have led
to greater pressure on economic resources and thus to increases,
not decreases, in real interest rates. As I will discuss
later, from a normative viewpoint, we have good reasons to believe
that the U.S. saving rate should be higher than it is.
Nonetheless, domestic factors alone do not seem to account for the
large deterioration in the U.S. external balance.
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