June 21, 2007


The Global Savings Glut and Its Consequences (Swaminathan S. Anklesaria Aiyar, 6/4/2007, American Spectator)

The world is experiencing an unprecedented glut of savings, driving down real interest rates. It is a good time to borrow rather than lend, and to buy equities rather than bonds. This has implications for central banks, corporations and individual investors.

China is investing $3 billion, a tiny fraction of its $1.2 trillion of reserves, in Blackstone, a U.S. private equity company. More such equity investments will surely follow. India, OPEC members, and other developing countries with large foreign exchange reserves should emulate China's strategy.

Foreign exchange reserves are typically invested in bonds of G-7 countries, above all in U.S. Treasury bonds. Former Treasury Secretary Larry Summers estimates that developing countries are holding more than $2 trillion of reserves in excess of their needs to combat currency volatility. [...]

Several developing countries are running large current account surpluses (representing an excess of savings over investment). So they are accumulating surplus dollars. China has the biggest surplus of $1.2 trillion, but other developing countries put together have accumulated almost as much. And oil exporters are accumulating reserves at the rate of $300 billion per year.

Rapid growth leads to high savings rates: people save a large fraction of additional income. In India, GDP growth has accelerated from 6% to 9%, lifting the savings rate from 23% a decade ago to 33% today. China's savings rate is a dizzy 55%. Not even the investment boom in Asia can absorb these huge savings, which are therefore put into U.S. bonds.

When a poor country buys U.S. bonds, it is in effect lending to the USA. It is paradoxical for the poor to lend to the rich, especially at depressed interest rates.

...then lend us back the money with which we buy them at low interest rates while we put our own money into higher yielding investments.

Posted by Orrin Judd at June 21, 2007 12:05 AM
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