Asian savings glut is self-serving theory

Any idea that is self-serving should be examined with particular scepticism. The fact that vested interests are involved in promoting a theory does not necessarily mean it is wrong, but it signals that careful scrutiny is in order.

The idea of an “Asian savings glut” certainly falls into this category (see page 21). Since March the US Federal Reserve has promoted the idea that excess Asian savings are the explanation for global economic imbalances – which in turn are widely seen as a key problem for the world economy. In recent months influential organs, including Business Week and the Financial Times, have endorsed the theory.

Debate over the savings glut is not just academic. It has important implications for the world economic outlook and how imbalances are likely to be resolved.

Advocates of the savings glut hold that Asia is saving far more than it can invest at home. As a result it has to find an outlet for its excess savings. From this perspective America is providing an excellent service to the world economy. Its highly efficient financial markets have enabled it to utilise Asian capital and keep the world economy growing strongly.

The savings glut theory is in sharp contrast to the previous orthodoxy on the American economy. This held that America was being too profligate – it was consuming significantly more than it produced. As a result it had to rely on Asian capital inflows to bail it out.

However, the savings glut theory cannot be dismissed simply because the Fed has an interest in offloading blame for global economic problems away from America. The notion has to be examined in its own terms.

From such a perspective there is probably less to it than meets the eye. The notion of savings may sound simple – invoking images of people putting money into bank accounts – but it is hard to define and measure. There is certainly an element of tautology in the argument: since Asia is not investing its entire savings there must be a savings glut. It could equally be argued that America is investing too little.

It is also important to reflect on the experience of the world economy in recent years. For a long time the Fed maintained negative real interest rates – in effect it was pumping enormous amounts of liquidity into the American economy. At the same time the federal deficit gave the US a huge fiscal boost.

Rather than a savings glut it seems America has piggy-backed on the dynamic Asian economies. The US has used its economic size and political muscle to attract resources from the rest of the world. From this perspective the American economy is inherently weaker than many assume.