“Convenient to the point of being self-serving … but it seems right”
Those are the words Charles Dumas and Diana Choyleva of Lombard Street Research use to describe Bernanke’s savings glut hypothesis in their book “The Bill from the China Shop.” They write:
In March 2005, Ben Bernanke, successor to Alan Greenspan as chairman of the Federal Reserve, followed the same logic, attributing US financial deficits to an “Asian savings glut.” For the Fed, his argment is convenient almost to the point of being self-serving. But it seems right.
I basically agree. That is a bit of a change. Back in early 2005, there seemed to be as much of an investment dearth as a savings glut. And some of the world’s excess savings seemed to stem from an excess of fiscal stimulus in the US. But since then, the amount of policy stimulus in the US has been scaled back while the savings surplus of China and the oil exporters has soared.
There remains one key point of difference. I still think Bernanke downplayed the role government policies — whether exchange rate pegs that have led to a surge in reserve growth, bank policies that have restrained credit growth to help sustain a real undervaluation or fiscal policies that have saved a very large fraction of the oil surplus — have played in generating the savings glut. Combine the savings of China’s state-owned business sector with the savings of oil-exporting government and it sure seems that the global savings glut is really a government savings glut.
China right now clearly has savings glut, not an investment dearth — at least is a glut means more than you know what to do with. China’s surging current account surplus (its savings surplus) has come in the face of surging investment. And China’s surging surplus has come in the face of a surging bill for imported oil — indeed, for imported commodities of all kinds.
Indeed, the fact that China’s “savings” surplus has soared — keeping Asia’s overall “savings” surplus growing — even as higher oil prices increased the “surplus” savings of the oil exporters goes a long way to explaining the “glut.” Higher oil prices — and higher oil state savings — could have been offset by lower savings in all oil importing regions. But the savings surplus of one oil importing region (Asia) has increased along side the oil surplus. That has left plenty of funds to finance deficits in the US and elsewhere at fairly low rates.
While I am marking my views to market, so to speak, I should formally recognize that the Michael Dooley, Peter Garber and David Folkerts-Landau have gotten an awful lot of things right over the past two years. They missed the impact of the oil exporters’ dollar peg, but it fits neatly into their overall hypothesis. The set of countries adding to their reserves has changed, but all available evidence indicates that the surge in emerging market reserve accumulation that started in 2002 has been sustained. 2006 reserve growth looks likely to at least match its 2005 levels.
China and the GCC countries continue to peg to the dollar. And a range of emerging economies — not the least Brazil in recent months — intervene to keep their currencies from appreciating.
The core issue raised in my Econoblog with Michael Dooley was whether or not an international monetary system based on large-scale reserve accumulation in the “periphery” that financed large deficits in the center was sustainable. Score the last two years for Dooley, Garber and Folkerts-Landau.
There is some evidence that China is tiring of its current pace of reserve growth. But there is little evidence that it is willing to allow a major move in its currency, one sufficient to really scale back its reserve growth. Rather, China seems to be desperately trying to convince Chinese firms not to convert their export earnings (as well as the money the State banks have raised from their IPOs) into RMB. That effectively just shifts dollar asset accumulation from one part of the state (the central bank) to another (state-owned banks and firms).
On one point though, I will claim a minor victory. I emphasized that that any stable international monetary system needs to be politically as well as economically sustainable. And I argued that China’s resistance to RMB appreciation would bring about a predictable political backlash inside the US against trade with China. That prediction seems pretty accurate.
It is also one of the risks that Dumas and Choyleva highlight.
No Responses to ““Convenient to the point of being self-serving … but it seems right””
DF • November 12th, 2006 at 11:52 pm
I think you could have added :
any stable international monetary system needs to allow ssustainable economic path at the national level.
Accross the world low interest rates helped by Bretton Woods II have created the biggest housing bubble ever (on top of reviving a stock market bubble).
It might be the case that Bretton woods II will collapse not because of less support for it by emerging countries, but simply because the bubbles explose in the USA and in the rest of the world.
How can you sell to people who do not want to borrow anymore ?
Guest • November 13th, 2006 at 4:03 am
An important speech by Robert Rubin (video at Bloomberg):
Gheorghius • November 13th, 2006 at 7:16 am
“Is the US in a position to fight the destabilising domestic consequences of foreign central bank reserve accumulation?”
A nice topic for an graduate/ undergraduate economic student essay! Long term goals and policy dilemmas would have to be clarified.
Guest • November 13th, 2006 at 8:05 am
Why should China pay the price for America’s profligacy in refusing to save and running huge government deficits by revaluing the yuan? The U.S. Treasury is printing too much money in order to keep America’s debt-ridden economy growing.
Since 60% of all U.S. dollars end up abroad, the Bush administration’s reckless spending and over-stimulative money policies have caused a dangerous world-wide cash flood and serious imbalances to the global economy.
At least China is governed by capable, intelligent people rather than the bungling politicians and crackpot ideologues that have run America onto the rocks.
http://torsun.canoe.ca/News/Columnists/Margolis_Eric/2006/11/12/2326507.html
Guest • November 13th, 2006 at 8:20 am
“At least China is governed by capable, intelligent people”
Margolis has never come across a fascist he didn’t like, particularly if the fascist is in the habit of engaging in the mass-murder of Tibetans or Jews.
algernon • November 13th, 2006 at 8:37 am
The problem I have with the world’s “savings glut” is that an awful lot of 10 yr. Tres. bonds have been bought with Yuan & Yen freshly created out of thin air.
Guest • November 13th, 2006 at 8:55 am
A major problem with the current monetary boom – the “Moneyness of Credit Bubble” – is the enormous and widening gulf between the market’s perception of safety and liquidity and the acute vulnerability of the actual underlying Credits. Runaway booms invariably destroy the “money” – in whatever form it takes – whose inflationary expansion was responsible for fueling the Bubble. This lesson should have been learned from the late-twenties experience, or various other fiascos as far back as John Law. When current perceptions change – when $ trillions of Credit instruments are reclassified and revalued as risky instruments as opposed to today’s coveted “money” – Dr. Bernanke will learn why a central bank’s monetary focus must be in restraining “money” and Credit excesses during the boom. And the longer this destabilizing period of transforming risky Credits into perceived “money” is allowed to run unchecked, the more impotent his little “mop-up” operations will appear in the face of widespread financial and economic dislocation – on a global scale.
bsetser • November 13th, 2006 at 9:33 am
True — yuan and yen have been printed to finance the purchase of treasuries and agencies. but those yen and yuan also have been held as cash/ cash equilvalents by the population of China/ Japan to a surprising degree. normally printing money = inflation; the puzzle is why that hasn’t happened.
Stormy • November 13th, 2006 at 10:01 am
So far the “political backlash” in the U.S. has been rather muted, rather tame.
Dave Chiang • November 13th, 2006 at 10:08 am
Normally printing money = inflation, but Chinese Industrial productivity has rapidly risen over the past decade while wages and salaries have not kept pace with the productivity increases. Under the current Neo-liberalism globalization regime, the Chinese workforce surfeit even for high skilled college graduates ensures that global Industrial production inflation will remain relatively contained despite rising prices for raw Industrial materials (ie. metals, energy, fibers, etc. ). As an investment strategy for the coming decade, avoid investments in global market sectors that have Chinese technology competition, but make investments in global market sectors that the Chinese economy is incapable of domestically producing such as raw commodities. Since these critical strategic commodities especially oil remain priced only in dollars, the Chinese are forced to continue to stockpile foreign reserves under the existing US Dollar hegemony regime.
a • November 13th, 2006 at 10:39 am
“As an investment strategy for the coming decade…”
Investment strategy for the coming decade ?? I’d be happy with one for next year.
Guest • November 13th, 2006 at 10:46 am
Fed Chairmen Alan Greenspan and Ben Bernanke have a lot to answer for. You may not think you’re longing for the return of tight money, but trust me, taking cheap money’s effects overall, you should be.
The Hong Kong based financial commentator Mark Faber, as reported by the Economist, believes that high commodity prices cause wars; by funding unattractive rent-seeking governments and starving more productive economies of resources. Since it’s clear that low interest rates have in the present cycle been a major cause of high commodity prices, it’s worth adding this to the lengthy catalogue of costs caused to the world economy by excessively cheap money.
Rewarding risk-takers and crooks. Cheap money does not only reward entrepreneurs, it also rewards risk takers and crooks. Because money is readily available, investors are continually seeking new investment opportunities, hence are less careful than they should be about matters of stewardship and corporate governance. Accounting standards are driven steadily downwards, as the worst accounting chicanery suffers little or no market penalty. Inevitably, lowlifes prosper in such an environment.
Excessive leverage and inadequate saving. Because money’s cheap, people borrow too much of it, maxing out their credit cards and buying houses with interest-only mortgages and no down payment. Naturally, a high proportion of these people get into trouble. Savings meanwhile have dropped to an all-time low, but why should you save when your assets are going up in value and your returns on saving are often negative after inflation and tax are taken into account? This generation is in for a penurious old age, and low interest rates will have been the cause.
Short termism and inflated expectations. In a period of loose money, everybody knows people who’ve made a fortune through stock speculation, options manipulation or real estate juggling. The human mind being what it is, observers assume that if the neighbor, not obviously smarter than they, can make a fast fortune, so can they. Consequently get-rich-quick schemes proliferate, with consequent damage to long term investment and hard work. Haloid Corporation took over a decade to perfect xerography in the 1950s; these days everyone assumes that the natural path is that of Google or YouTube, from college student to billionaire in less time than it takes for a PhD.
Guest • November 13th, 2006 at 11:41 am
“In summary, fundamentals suggest that the U.S. dollar will soon resume the downdraft that began in 2001. The dollar’s path may be jagged, but its long-term destination is depreciation against a range of both developed and developing countries’ currencies. Given the risks to the dollar, investors in U.S. fixed income may want to consider broad and diversified exposure to non-dollar currencies, as both a hedge against dollar weakness and a potential source of alpha versus U.S. fixed income benchmarks.” http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2006/Global+Perspectives+November+2006.htm
Guest • November 13th, 2006 at 11:54 am
To Guest post at 2006-11-13 08:20:47:
Please stop with the personal attacks. Take your gripe elsewhere.
Guest • November 13th, 2006 at 12:02 pm
Isn’t the real political backlash in China, against its own administration? One reason, apparently due to conflicts about innadequate compensation, growing wealth disparities and new and rising costs, that have been mentioned many times on this blog, but aren’t acknowledged in official statistics:
“…essential medical care had been denied the boy until his grandfather, who was taking care of him, could pay. The boy died after the grandfather left to raise money, the group said…” http://www.nytimes.com/2006/11/13/world/asia/13china.html
Joseph Wang • November 13th, 2006 at 1:10 pm
I really don’t see a political backlash against China in the United States. Iraq overwhelms anything that has to with China, and I found it really funny to see Chuck Schumer talking about changing financial laws to make NYC attractive to foreign investors again.
The really interesting thing will happen around 2020 when all of those retiring Chinese start breaking open their piggy banks around the same time that baby boomers in the United States start to retire.
kz • November 13th, 2006 at 1:48 pm
My implication regarding Japan is that Japan was supported by heavy saving by household and investment by domestic firms, a bit different from China today. When the asset bubble burst in 90 and 91, the firms faced huge balance sheet issue as their assets collapsed; hence, they quickly lowered their investment in order to pay off their debts. The collapse of investment was one of the main reasons why Japan fell into a long recession.
Japan did not rely on FDI like China does today. While Brad argues that FDI to China is not needed as China saves enough already, if FDI to China stops, Chinese household may have to join the party of saving and that may lower the potential of Chinese consumption. That’s another difference between Japan back then and China today. Japanese firms did not save at all before the bubble burst while Chinese firms do, accoridng to Brad and Kujik (was that his name?)
Japanese banks such as Sumitomo demanded deposits from real estate firms for doing favors of introducing them. Hence, the real estate bubble that inevitably burst. As far as I see, the real estate bubble in China is much better controlled than Japan in the late 80s.
Observing the nominal and real exchange rate of JPY from BoJ web site, my understanding is that the JPY appreciation during the Nixon Shock was appropriate; in fact, Japan had 20% GDP Growth in 1973. It boosted up its consumption, albeit temporarily. But the JPY appreciation in 1985 was absolutely inappropriate.
On that note, export volume divided by GDP for China today is much higher than Japan back then. In that regard, China is absolutely too dependent on export industry.
A lot of thoughts; I apologize for the lack of organization.
kz • November 13th, 2006 at 1:48 pm
My implication regarding Japan is that Japan was supported by heavy saving by household and investment by domestic firms, a bit different from China today. When the asset bubble burst in 90 and 91, the firms faced huge balance sheet issue as their assets collapsed; hence, they quickly lowered their investment in order to pay off their debts. The collapse of investment was one of the main reasons why Japan fell into a long recession.
Japan did not rely on FDI like China does today. While Brad argues that FDI to China is not needed as China saves enough already, if FDI to China stops, Chinese household may have to join the party of saving and that may lower the potential of Chinese consumption. That’s another difference between Japan back then and China today. Japanese firms did not save at all before the bubble burst while Chinese firms do, accoridng to Brad and Kujik (was that his name?)
Japanese banks such as Sumitomo demanded deposits from real estate firms for doing favors of introducing them. Hence, the real estate bubble that inevitably burst. As far as I see, the real estate bubble in China is much better controlled than Japan in the late 80s.
Observing the nominal and real exchange rate of JPY from BoJ web site, my understanding is that the JPY appreciation during the Nixon Shock was appropriate; in fact, Japan had 20% GDP Growth in 1973. It boosted up its consumption, albeit temporarily. But the JPY appreciation in 1985 was absolutely inappropriate.
On that note, export volume divided by GDP for China today is much higher than Japan back then. In that regard, China is absolutely too dependent on export industry.
A lot of thoughts; I apologize for the lack of organization.
Lord • November 13th, 2006 at 2:08 pm
America may have to become even more profligate to force the destruction of currency pegs since this is the only means they are willing to undertake and the path of least resistance.
Cyrus • November 13th, 2006 at 2:21 pm
True — yuan and yen have been printed to finance the purchase of treasuries and agencies. but those yen and yuan also have been held as cash/ cash equilvalents by the population of China/ Japan to a surprising degree. normally printing money = inflation; the puzzle is why that hasn’t happened.
Increases in the stock of money do not have to produce inflation, if they are offset by rising real national income and/or reduced monetary velocity. In China, real national income is clearly rising. (Enough to be an explanation? That depends on how much increase in the money stock we are trying to explain.)
In Japan, it’s hard to understand how rising interest rates around the world, yea, even in Japan itself, can reduce already-low monetary velocity, unless perhaps a significant fraction of Japanese investment is engaging in strategies that place a premium on liquidity, and maintaining cash reserves in anticipation of opportunities to speculate.
Dave Chiang • November 13th, 2006 at 2:21 pm
“the real estate bubble in China is much better controlled than Japan in the late 80s.” – KZ
At the bubble peak, Tokyo real estate was worth more than California. One acre of land in downtown Tokyo was worth a cool 1 billion dollars, and some condo flats were selling at 10 million dollars. There is a asset bubble in Shanghai and Beijing, but it has not gone to the extremes of the Japanese bubble. Two hundred thousand US dollars can buy a very nice condo flat in Shanghai Pudong district. – DC
“export volume divided by GDP for China today is much higher than Japan back then.” – KZ
But Chinese exports are more broadly diversified today than Japan back then which primarily relied on the US market. Over the past year, Chinese exports to Europe are outpacing exports to the US market. Most of Chinese trade consists of inter-regional trade with neighboring Asian partners. For instance, China has replaced the US as South Korea’s largest trading partner. The Chinese economy is absolutely not as dependent on the US Economy as Japan was during the 1980′s. – DC
Guest • November 13th, 2006 at 2:34 pm
re: “America may have to become even more profligate…”
A Zero Interest Rate Policy (ZIRP) Remedy to Global Imbalances: The paper proposes a Japan-style zero interest rate policy (ZIRP) in combination with strategic and iterative fiscal tightening as a targeted response to global imbalances, creating a “synthetic” trade tariff for foreign exporters of capital, and effecting a redistribution of wealth from asset-rich savers to debt-laden consumers in the US. The desired policy objective is to eliminate the US twin deficits and reduce US debt levels without either inducing an asset-deflation driven economic recession or explicitly legislating protectionism to reverse the progress of globalization.
Guest • November 13th, 2006 at 2:41 pm
if someone can clarify the issue of property rights – it is my understanding that buyers of Chinese real estate do not really ‘own’ the property. Don’t know about Japan. But one can assume that differences in property rights should be reflected in the price. Isn’t there also a risk in China that one’s new condo could be declared an ‘illegal’ development? This risk should also be reflected in the price. Also issues of affordability. A pollution discount in some areas. As a foreigner, shouldn’t my US dollars be able to buy relatively cheap property due better purchasing power? Not sure if there is a viable comparison between Japan and US, then as now global real estate markets overall have evolved quite a bit.
Guest • November 13th, 2006 at 2:44 pm
Thought too that that Japanese real estate bubble was for the most part in commercial property. Not sure about China.
Guest • November 13th, 2006 at 2:54 pm
may be a bit more to economic interdependency than the trade in ‘stuff’ between 2 nations.
Rybinski • November 13th, 2006 at 4:16 pm
Brad, BW2 is just one of about 10 theories that aim to explain what created global imbalances (global saving glut, global investment drought, optimal US consumer behavior, shocks affecting EMU potential or Asian ability to create financial assets, dark matter, precautionary motives to build reserves, and very recently Caballero asset shortages theory (see my blog http://www.rybinski.eu for a short summary of papers presented at the recent ECB conference, which included Caballero paper, by the way this is probably the first central banker blog in history, I am waiting to see the next version of Mishkin paper about CB transparency going too far).
I think that China story goes well beyond what macro people tell. Recent WIPO report puts China at the fifth place of most innovative nations (ahead of Germany – Mein Got). Many companies now outsource knowledge processes to China (KPO) despite intellectual property worries, and China puts a lot of efforts to build relationship capital with poor countries from Cambodia to Zimbabwe, and the recent African summint in Beijing is a best example.
Before becoming the central banker I spent seven years as investment bank chief economist, and I know that simple stories told to clients are catchy. But this is not export or die story of BW2. I am sure that we see a begining of something much bigger, that the power of economic decision making is moving to Asia, that Asia understand much better than we do how to develop the most important asset of the 21st century: intellectual capital. This is much more important for the future than the pace of apreciation of renminbi.
Guest • November 13th, 2006 at 4:29 pm
China’s broadest measure of money supply picked up its pace of expansion in October, reigniting expectations that more tightening measures may be needed in coming months despite tame inflation.
Singapore will raise its goods-and-services tax to 7% from 5% and direct the extra revenue toward its poorest citizens.
PHS • November 13th, 2006 at 4:37 pm
Guest, Clarification of Property Rights
As I understand it the state “owns” all of the property in the People’s Republic of China. Developers in the cities buy the rights to “use” the land for 70 years and then build apartments on it. Citizens can “buy” the use of the apartment and pay a property and sales tax on the apartment/villa/home. What will happen over time is anyone’s guess, as the system is less than ten years old. I expect that the “selling” price of an apartment will decrease in time to reflect the reduced time one may have to “own” the property.
Citizens in the countryside do not “own” land either. The village collectively owns the land and all are guaranteed 1.2 mu, or about 1/5 an acre. A citizen may rent more space for use, in contracts of variable lengths, the longest being 30 years.
Guest • November 13th, 2006 at 4:48 pm
re: “the power of economic decision making is moving to Asia”
only to remind that a great deal of that power has also migrated to other regions – North America and Germany included – where that relationship building also involves the quiet building of interests in key assets along with the physical transfer of people who, whether or not they are, or remain ‘loyal’ to the party(?), still retain strong ties through family and financial interests back in China. The question being if more attention should also be paid to ‘greater China’ and how it too may affect imbalances.
Guest • November 13th, 2006 at 5:05 pm
Thank you PHS. Only one, but very important difference affecting price.
Rybinski – I should have first asked if you are referring to the power of economic decision moving to the CCP, being the ruling party of the PRC?
bsetser • November 13th, 2006 at 5:16 pm
Rybinski — thanks for your comment. i tend to believe that BW2 fits the facts better than most (I am not a big fan of Caballero’s explanation, since the Emerging world has no trouble generating financial assets private investors want to hold). But no doubt there are a host of different explanations — in this post, I was simply trying to make a narrow point.
Dooley et al predicted that EM central banks seeking to limit the appreciation of their currencies against the $ would intervene heavily, build up reserves and in process finance current account deficits in the center for an extended period of time. so far, they have been right.
that leaves aside the motivation for their reserves growth. I tend to find “precautionary explanations” unpersuasive (don’t China and russia already have enough to meet any plausible set of precautionary concerns), but there clearly is a debate.
I’ll be sure to check out your blog regularly!
HZ • November 13th, 2006 at 11:15 pm
PHS,
That (no land ownership) is not uniquely Chinese. In Hawaii there used to be very few people who own land via fee simple titles. Do a search and check out how that was resolved.
Guest • November 14th, 2006 at 6:05 am
With all due respect, PHS was answering a question about China. If you want to talk about Hawaii, you might want to reciprocate with a bit more information as to why this example in particular may relate to PHS’s response. PHS and, I assume, most of us know that many different factors influence the price of real estate assets globally and regionally.
