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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

Recent Developments
I turn now to a review of developments since I last spoke on these issues two and a half years ago.  In brief, external imbalances have become wider since 2004.  Both the geographical pattern of these imbalances and their sources in terms of saving and investment rates have changed a bit.  Nevertheless, the broad configuration that developed after 1996 still seems to be in place today.

As the table shows, the U.S. current account deficit has widened further in the past two years, from $640 billion in 2004 (5.5 percent of GDP) to $812 billion in 2006 (6.2 percent of GDP), although it fell a bit in the first quarter of this year, to $770 billion at an annual rate.  In an accounting sense, the increase in the U.S. deficit over this period reflects primarily an increase in the investment rate from about 19 percent of GDP in 2004 to 20 percent of GDP in 2006.  The U.S. national saving rate did not change significantly over that period.

Meanwhile, the aggregate current account surplus of emerging-market economies expanded about $350 billion, from $297 billion in 2004 to $643 billion in 2006; almost all the increase was attributable to a higher aggregate rate of saving.  A significant portion of this further growth is due to China, whose current account surplus swelled an additional $180 billion, rising from 3.6 percent of national output in 2004 to 9.4 percent in 2006.  The increase in the Chinese surplus can be attributed primarily to an increase in the saving rate between 2004 and 2006.  The increase in China's saving rate could, in part, be a consequence of the rapid pace of growth in the country.  That is, with income growing very rapidly, but with consumer credit not readily available and precautionary motives for saving remaining strong, consumption is failing to catch up. ⁶  Also contributing to high saving rates was the authorities' decision to limit currency appreciation, thereby restraining import demand and boosting exports.

Oil exporters have also contributed significantly to the recent increase in the aggregate current account balance of developing countries.  The combined current account balance of the countries of the Middle East and the former Soviet Union (which include a number of large oil exporters) rose about $150 billion between 2004 and 2006.  Again, the increase is almost entirely reflected in higher saving rates, as the oil exporters continue to save a large portion of the increased revenue resulting from higher oil prices. 

In contrast to the situation in emerging markets, the aggregate current account surplus for industrial countries other than the United States declined recently, from almost $350 billion in 2004 to about $200 billion in 2006; most of the decline reflected a sharp drop in the euro-area balance.  Thus, unlike in the 1996-2004 period, industrial countries other than the United States have absorbed part of the increase in the net supply of capital coming from the emerging-market economies.  In aggregate, the recent decline in the current account balances of non-U.S. industrial economies reflects an increase in investment rates; saving rates have generally remained little changed. ⁷  In short, in the emerging markets, realized saving and current account surpluses have increased since 2004.  In the industrial countries, over the same period, current accounts have moved further into deficit, primarily because of higher realized rates of investment.

What about real interest rates?  Since I discussed these issues in March 2005, real interest rates have reversed some of their previous declines.  For example, in the United States, real yields on inflation-indexed government debt averaged 2.3 percent in 2006 as compared with 1.85 percent in 2004.  In the past few weeks, that yield has averaged about 2.4 percent.  Inflation-adjusted yields in other industrial countries have also started to move back up after falling in 2005. ⁸      

How does this all fit together?  My reading of recent developments is that although some of the details have changed, the fundamental elements of the global saving glut remain in place.  Most important, the emerging-market countries and oil producers remain large net suppliers of financial capital to global markets.  The mix of suppliers of funds and the factors motivating that supply have changed a bit:  China and the oil exporters account for a larger share of the developing countries' aggregate surplus, and developing Asia excluding China accounts for somewhat less.  Also, the further expansion of the region's net supply of saving in the past two years appears to reflect primarily an increase in desired saving by the emerging-market countries, whereas the previous increase in net saving also involved some decline in desired investment in East Asia after the financial crises of the 1990s.  Exchange rate policies in Asia have also influenced desired saving in that region.

Further increases in net capital flows from the developing economies, all else being equal, should have further depressed real interest rates around the world.  But as I have noted, in the past few years, real interest rates have moved up a bit.  This increase does not imply that the global saving glut has dissipated.  However, it does suggest that, at the margin, desired investment net of desired saving must have risen in the industrial countries enough to offset any increase in desired saving by emerging-market countries.  This characterization is certainly consistent with the pickup in investment rates in the industrial countries, which I noted earlier, and it is also consistent, more generally, with the recovery of domestic demand growth in Europe, Japan, and other parts of the industrial world.  In summary, economic growth over the past few years, especially in industrial countries, has apparently been sufficient to increase the net demand for saving and thus to raise global real interest rates somewhat.

Once again, however, I do not want to rely exclusively on this line of explanation for the behavior of long-term real interest rates, as other factors have no doubt been relevant.  In particular, term premiums appear recently to have risen from what may have been unsustainably low levels, in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking.

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