Earlier this year, Benjamin Bernanke, then a member of the US Federal Reserve Board of Governors, and now the head of President Bush?s Council of Economic Advisers, suggested that there might be a ?global savings glut,? with high savings outside the US leading to low interest rates in a time of strong economic growth, as well as allowing the US to run record current account deficits.
What was the basis for this claim? Savings as a percentage of world output are not high by historical measures, but weaker investment demand has been a widespread phenomenon since the Asian crisis of the late 1990s, the stock market deflation in 2000, and the uncertainties of the post-11th September world. At the same time, differences in demography (particularly the aging of some nations? populations), national policies, and ownership of natural resources (oil and gas) have led to swings in domestic savings-investment balances (a global ?thrift shift?). The main symptom of these changes seems to be that China is, in effect, financing US consumption and housing expenditure to enable its own rip-roaring, export-led growth.
Economists disagree on how long the current macroeconomic imbalances can continue, and how best to rebalance the world economy. Prescriptions include fiscal consolidation and reductions in housing tax breaks in the US, monetary loosening by Europe, and greater government social spending in China. There?s also the issue of the oil-exporting countries? windfall gains?projected at $400 billion savings surplus in 2005 by the IMF. Certainly, short-run macroeconomic policies are important: they can prevent imbalances from blowing up and leading to panic and crisis. However, there are longer-term issues at stake, and the rebalancing will not be a return to the status quo ante. What is at stake, what might happen, and where does India fit in to this major global shift?
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