After the Savings Glut
Addressing to the Virginia Economics Association at the Sandridge Lecture in 2005, the FED ex-Governor gave a conference, in which he justified the huge deficit on the U.S. trade balance with the existence of a world savings glut, opposing to the traditional justification of the twin-deficits.
Ben Bernanke excluded easily the twin-deficits hypothesis, with the simple argument that, in the previous years, the U.S. indeed suffered a tremendous deficit in the trade balance, but it wasn’t accomplished by a deficit in the Government budget. Then he pointed out that in the last years (1995-2005) there was a huge increase in savings in South American Countries (mainly because of the massive pressures generated for these countries to create a credible monetary and currency policies, after the Mexican and the Argentinean bail-outs), so as in oil producer countries and in China. Then this countries started to augment their dollar’s reserves, this created pressures in the U.S. for the interest rate to fall and consequently to increase the trade budget deficit.
The ex-governor pointed this out: “The development and adoption of new technologies and rising productivity in the United States–together with the country’s long-standing advantages such as low political risk, strong property rights, and a good regulatory environment–made the U.S. economy exceptionally attractive to international investors during that period. Consequently, capital flowed rapidly into the United States, helping to fuel large appreciations in stock prices and in the value of the dollar.”
The scenario was closely the same until 2008 (having the lower record low at the -67823 USD Million in August of 2006), but from this year forward the government deficit started to increase, doubling the public debt from 40 to 80% of GDP. And at the same time the trade balance remained in the negative side. For the generality of the European countries the same happened, but in some of them the government debt crisis was even sharper (however it is important to refer that Portugal, which faced huge government deficits, was able to turn the trade balance from negative to positive).
In the majority of the western countries (considering European countries and the U.S.) there was a change and aggravation in the government deficit, but the trade balance, which was negative, remained in the negative side. This is a paradox, because the poorer countries are lending money to the richer ones. We should expect the opposite. And this will have some perverse effects on the future.
There is also other fact which stresses more this scenario – demography. Both the U.S. and Europe (also China, although it is still not a developed country, but because of its anti-birth policies, has the same demographic problem) are suffering a strong aging of their population, their future is not bright, there will be less adults to sustain more elders. This fact would also lead us to expect that this would be the time for developed countries to save, in order to be prepared for demographic problems in the future. (In this sense China is much more prepared for the future demographic unbalance than Europe and the U.S., because they are saving now.) There is in the international Economy a double paradox: the younger and poor countries are lending to the elder and richer ones, when we expected elder lending to younger, and richer to poorer… This gives rise for inequality today, but for unpredictable and dangerous problems for Europe and U.S. tomorrow. (However we have to recognize, that the surplus in the Trade Balance is helping to develop poorer economies, in the sense that it promotes their exports and production, and by consequence the development in their production process, which is an essential part for the development of every economy.)
However the problem stands in the huge difference in the consumption patterns – the Western world is now dominated by a wild consumerism, from which it doesn’t want to abdicate. But is it sustainable? The current crisis, so as the aggravation in demographic patterns, makes us believe that these patterns are not sustainable at all. There must be a reduction in the consumption levels in the western countries, in order to contradict and to compensate the deficit on the trade balance. There must be an increase in savings, not only to compensate the negativity of the last years, but also to prepare for a darker future, that will appear, mainly because of demographic factors.
Are we prepared for it now? Do we want to do it? No, of course not, we would prefer to increase our consumption levels to infinite, we prefer to think that our sons will pay the debt, and then think that our sons will think that their sons will pay the debt, and so on… But after the savings glut, the scenario is tremendous for the entire western world, which will be in huge and durable problems, when the countries in development stop to lend, and start ask payment for their loans.
Then the young generations of today will have to sustain the retired elders (which will constitute the majority of the population) and, at the same time, they will have to pay all the debt, which was created during all the last years! Impossible…
António Capela nº739
Bernardo Branco Gonçalves nº771