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.

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.

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.