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Speech  continued

Chairman Ben S. Bernanke

At the Bundesbank Lecture, Berlin, Germany

September 11, 2007

Global Imbalances: Recent Developments and Prospects

In my earlier speech, I put forth an alternative explanation that is consistent with each of the three basic facts I listed earlier.  That explanation takes as a key driving force a large increase in net desired saving (that is, desired saving less desired domestic investment) in emerging-market and oil-producing economies, a change that transformed these countries from modest net demanders to substantial net suppliers of funds to international capital markets.  This large increase in the net supply of financial capital from sources outside the industrial countries is what, in my earlier remarks, I called the global saving glut.

To interpret the rise in net saving in emerging-market countries as causal, we need to identify factors in those countries that may have caused their desired saving to rise, or their desired investment to fall, or both.  In fact, several factors appear to have contributed to the increase in the supply of net saving from emerging-market countries.  First, the financial crises that hit many Asian economies in the 1990s led to significant declines in investment in those countries (in part because of reduced confidence in domestic financial institutions) and to changes in policies--including a resistance to currency appreciation, the determined accumulation of foreign exchange reserves, and fiscal consolidation--that had the effect of promoting current account surpluses.  Second, sharp increases in crude oil prices boosted oil exporters' incomes by more than those countries were able or willing to increase spending, thereby leading to higher saving and current account surpluses.  Finally, Chinese saving rates rose rapidly (by more even than investment rates); that rise in saving was, perhaps, a result of the strong growth in incomes in the midst of an underdeveloped financial sector and a weak social safety net that increases the motivation for precautionary saving.

The combined effect of these developments, I argued, raised desired saving relative to desired investment in the emerging markets, which in turn led to current account surpluses in those countries.  But for the world as a whole, total saving must equal investment, and the sum of national current account balances must be zero.  Accordingly, in the industrial economies, realized saving rates had to fall relative to investment, and current account deficits had to emerge as counterparts to the developing countries' surpluses.  This adjustment could be achieved only by declines in real interest rates (as well as increases in asset prices), as we observed.  The effects were particularly large in the United States, perhaps because high productivity growth and deep capital markets in that country were particularly attractive to foreign capital.  The global saving glut hypothesis is thus consistent with the three key facts I noted earlier.

To be sure, the global saving glut was not the only factor behind the decline in long-term real interest rates since the 1990s.  As I described in subsequent remarks (Bernanke, 2006), term premiums also declined during this period for reasons that are debated but may have included a perceived reduction in uncertainty regarding inflation and the real economy as well as increased demand for longer-term securities by various institutional investors, including pension funds and foreign central banks.  Changes in the global pattern of saving and investment surely played an important role in the decline in long-term rates, however.

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