March 11, 2005


Fed governor takes on ‘global savings glut’
(Andrew Balls, March 11 2005, Financial Times)

Ben Bernanke, a Fed governor, pointed to a “dearth” of investment oppportunites abroad in explaining the flow of foreign capital to the US, attracted by high productivity growth, and deep, liquid and well-regulated capital markets. [...]

A combination of high savings rates in Japan and Germany, poor domestic investment oppportunities, and a shift from current account deficits to surpluses in emerging market countries has contributed to excess global savings.

In the late 1990s this lead to the rise in the US stock market. The continued flow of capital into the US, since the bursting of the Nasdaq bubble, five years ago and drop in corporate demand for financing, has contributed to expensive bond prices and the house price boom, Mr Bernanke said.

House price rises, in turn, have encouraged consumer spending and low household savings. [...]

Many rich countries outside the US appear to have a “dearth of domestic investment opportunites,” he said, pointing to declining workforces, ageing populations, and already high “capital-labour ratios”.

Meanwhile, the flow of investment to emerging markets in the early 1990s in many cases was not productively used, he said, going to government spending or low-return investments as a result of under-developed banking sectors.

Following the emerging market crises of the late 1990s, countries have built up large foreign exchange reserves and have run current account surpluses to insulate themselves from future international volatility.

The sharp rise in oil prices has also contributed to the savings glut, Mr Bernanke said, as oil-producing countries in the Middle East and elsewhere has recycled revenues into US assets.

Rather than purely “inward-looking” US policies, he concluded, and effort is needed to help developing and emerging market countries to improve their investment climates, strengthen domestic financial institutions, so they become international borrowers to finance domestic growth rather than shipping capital to the US.

Low household savings?: American household wealth surges to new record--Fed (Reuters, Mar 10, 2005)
Rising real estate prices and a resurgent U.S. stock market pushed the net wealth of American households to a record high in the fourth quarter of 2004, the Federal Reserve said on Thursday.

In its quarterly "Flow of Funds" report, the central bank said household balance sheet values rose to $48.53 trillion in the fourth quarter, up from $46.59 trillion in the third quarter.

Posted by Orrin Judd at March 11, 2005 12:00 AM

Balance sheet values being the key term. "Paper" money per se, doesn't really equate to purchasing power. So many people I know are locked into their houses b/c they can't afford anything else - these same people are scrounging by with interest only mortgages just to be able to afford that house to boot. Then again, I live in La La Land (SoCal) - which is the anomoly of anomolies.

Posted by: fat kid at March 11, 2005 1:33 AM


And at the end of the day they own an expensive house.

Posted by: oj at March 11, 2005 7:54 AM


Not with an interest-only mortgage they don't.

Posted by: Brian (MN) at March 11, 2005 8:44 AM

At the end of the day, yes.

Posted by: oj at March 11, 2005 9:17 AM

Mr. Judd;

No, at the end of the day they'll declare bankruptcy to clear themselves of negative equity. I know people in CA in that situation.

Posted by: Annoying Old Guy at March 11, 2005 9:34 AM

Most won't.

Posted by: oj at March 11, 2005 9:39 AM

even with an interest only loan, a socal home owner will make enough in 5 years to pay cash for a nice home almost anywhere else in the country. its hard to get upset about asian immigration when they are putting so much $$ into the market.

Posted by: cjm at March 11, 2005 10:37 AM

Ah, the Fed as the last proponent of mercantilism. How avant.

Posted by: Luciferous at March 11, 2005 12:57 PM

25% of new home purchases are for investment properties. Where are the renters going to come from, they are buying houses too? The market has reached the frothy stage, it will turn.

Posted by: Robert Duquette at March 12, 2005 12:42 PM

The renters will buy, as they are now.

Posted by: oj at March 12, 2005 12:49 PM