A Savings Glut? More like a global imbalance.

(This is in response to an article in The Guardian).

 In order to argue that a "savings glut" exists, we must assume that a considerable amount of people all over the world have been busy not spending and not borrowing. This finds its expression in the current account status of particular economies - China, Japan and other nations have huge current account surpluses as the people in those nations save and produce rather than borrow and consume.

But economics is always a matter of balance. The international "savings glut" must be balanced by a commensurate "borrowing glut" elsewhere, where people and businesses are borrowing and consuming rather than saving and producing. Again this can be found in the current account - nations with current account deficits are nations who are borrowing and consuming too much.

To argue that the world is suffering from a "savings glut" is to place the blame on one part of the world over another. America has been part of a "borrowing glut" and needs to take responsibility for its part in the world economic crisis.

The reality is that the entire world has been suffering from an economic imbalance. You can't call it either a "savings glut" or a "borrowing glut". China and Japan saved too much, America and Britain borrowed to much, China and Japan produced too much, America and Britain consumed too much.

The ideal situation is for economies to balance themselves out and aim for a equal amount of borrowing and saving, and an equal amount of producing and consuming. This finds expression in a balanced current account, whereby the current account is neither in deficit or surplus over the long term.

Of course there is the idea that some nations should go through a savings phase or a borrowing phase. The problem is that with national currencies, such necessary phases lead to currency speculations and eventual imbalances. Just as it was right for the market to invest heavily in tech stocks back in the mid 1990s, so was it wrong for the market to over-invest in such stocks by the late 1990s. The same goes for currencies.

It is here that the advantage of a shared currency zone comes about. The European Union's current account has been very low since the introduction of the Eurozone in 1999. The Eurozone's current account was last recorded at -0.9% of GDP, which is very low compared to the -6% run by the US over the years and the +6% run by China over the same period. Yet within the Eurozone we see a number of nations running very different current accounts, with Germany and the Netherlands running large current account surpluses and Spain and Greece running large deficits. Yet because these countries are part of one currency zone, such differences do not result in currency speculation.

For nations with their own sovereign currency, the best solution would be for politicians and central bankers to realign their current accounts through fiscal and monetary means. This means that the US needs to reign in its current account deficit. It also means that Japan and China need to reduce their current account surpluses.

Remember - in economics, balance is the key. To argue that a current account deficit is bad and that a current account surplus is good is a return to bad old days of mercantilism. The fact is that both are bad, and that the closer the current account is to zero, the better the economy will be.

In the current situation, nations with large current account surpluses (such as Japan, China, Sweden, Switzerland, Hong Kong, Malaysia, Singapore, South Korea, Taiwan, Thailand) need to revalue their currencies (sell off US dollars and buy their own currencies), lower their interest rates and set up fiscal stimuli. By doing this, these producer nations will begin to consume more and save less. At the same time, nations with large current account deficits (USA, Britain, Australia) should encourage savings by increasing interest rates. While this will depress domestic demand in these countries, economic growth will be focused more on the external demand driven by the stimuli enacted in the first group of countries.

As it stands now, unfortunately, the imbalances remain. The US, Britain and Australia have enacted stimuli while nations with large current account surpluses have protected their industrial base by keeping their currencies low. It's simply more of the same and does nothing at all to solve the problem except in the short term.

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