Global Saving Glut vs Excess Elasticity - Essay Example

GLOBAL SAVING GLUT VS. EXCESS ELASTI al Affiliation Global Saving Glut Vs. Excess Elasti Introduction The global savings glut hypothesis explains the differences between the savings and the intended investments (Bernanke, 2005). Global saving glut principles have been obtained from the U.S economy based on surpluses and deficits. It explains the relationship between monetary policies and increases in global saving supplies. Surpluses in planned savings and deficits in investment intentions led to a fall in the real long-term interest rates and their capitalization rates (Bernanke, 2005). As a result, there was an increase in the prices of houses and real estate in various countries including the U.S. Global imbalances They can be referred to as the differences between countries based on capital investments and assets. The imbalances can be caused by the difference in resources as explained in the Capitalism theory. The thesis explains the rise of global competition that causes countries to take advantage of each other based on the capital flows and trade imbalances. However, Bernanke has acquired his comprehension of global differences from the deficits and surpluses that are caused by capital flow between different countries. Ben Bernanke’s global savings glut view of global imbalances Ben has focused on the nature of current accounts from various developed countries before and after the economic recession in the late 2000s. The free flow of capital through allocation of savings to productive investments in different economies leads to various economic benefits (Borio and Disyatat, 2011). However, international capital flows and transfers have long-term challenges that occur due to financial instability and slow macroeconomic adjustments. His research shows that since a break in the equity market bubble, there has been the need for companies to adopt modern ways of borrowing funds to increase their capital investments (Bernanke, 2005). The firms have invested in financial surpluses that can be used to lend and invest in other sectors of the economy. Companies preferred using their profits and cash hoards to buy back their own shares to make investments. Developing countries such as those in Asia had been major importers of capital through borrowing from other economies to facilitate their development needs (Borio and Disyatat, 2011). Conversely, due to various financial crises, the countries decided to come up with their policies that protected them from foreign assets. Consequently, most of the exported capital ended up in the U.S leading to a trade deficit. There was an increase in capital inflows in the country together with other developed countries that required capital investments (Bernanke, 2005). The capital flow was too much that it exceeded the economies of the receiving countries leading to financial imbalances. Mr. Bernanke claims that banks in these countries ‘fooled’ the investors to acquire part of the foreign capital that was mostly housing wealth without defining the risk terms to them (Bernanke, 2005). The large capital inflows caused the financial institutions to take advantage of the situation through a created illusion of wealth. An influx in investors with the aim of increasing wealth status was experienced because the currencies were strong and asset prices were rising. However, the investors were unaware of the debts that had been incurred by the country in the end from the exporters of the capital. Most of the investors faced the problem on foreign currency whereby loans to the asset had been denominated in foreign currency. As a result, the U.S experienced a decrease in demand for manufactured goods because of the deficit in capital and cash. Current account deficit Ben has given an example with the U.S economy to show the procedure and growth of the current account deficit. For example, in 2004 the country had a deficit of more than half a billion dollars that was an increase compared to the previous year. Consequently, the country invested in borrowing from international capital markets (Bernanke, 2005). The global changes may occur due to international trade policies as stipulated in the theory of international trade. The theory provides information on policies that can be adopted by global economics in order to exist and ensure balances of trade. The import amounts in the U.S exceed the exports; hence, leading to a trade imbalance, which has contributed to an increase in current payments paid to foreign residents that later save and invests in their countries. The Keynesian theory can be used to explain the balance of trade benefits whereby different economies come up with monetary and fiscal policies to regulate the imports and exports that may cause imbalances between countries. The monetarist theory has a different view on the current deficits and refers to the balance of trade as a profit rather than a loss. The difference in prices can earn foreign investors profits that will benefit their economies leading to an increase in current deficits in the foreign country. Rising global imbalances based on the international current account balances The low capital expenditure factor is seen as a hindrance in the economic sector due to lack of sufficient investments (Borio and Disyatat, 2011). Most corporate bodies prefer saving since there are fewer investments to venture in the markets. The U.S has an oversupply of stock that can be used as an investment, but most firms are running under full capacity. The current deficit crisis led to the devaluation of assets in the country that included the stock from various firms (Eichengreen, 2009). Consequently, most potential investors transferred their resources to asset liquidity and financial accounts leading to an increase in the amount of cash flow. The transfer caused a decrease in the capital outflow from the firms. The cash flow is used as savings that exceeded the amount of expenditure which, in this case, is the investment in various sectors of the economy. The amount being held is trapped in economic and political uncertainty that would lead to an increase in the worth of investments. The global imbalances led to a situation whereby developed countries such as the U.S became borrowers from developing countries (Krugman, 2009). They had to borrow in order to compensate for the deficit in current accounts that had been caused by the surge in saving. Developing countries such as China at the time had caused capital surpluses in the American markets. There was increased capital inflow into developing countries that was aimed at causing a balance of trade that later caused capital imbalances. The capital inflow into the U.S led to an increase in the dollar value; hence, leading to cheaper imports while the exports fetched high prices globally (Eichengreen, 2009). The switch from international lenders to international borrowers was caused by the current account deficits in the U.S. However, the transmission depends on various factors that include the house prices, equity values, exchange value of the dollar and the real interest rates. The rates can be explained by the Keynesian theory due to the short-term reaction of the government to prevent further deficits. During the technological boom in the early 1990s, the U.S was the preferred country of investment due to the depth and sophistication of the country’s economy and financial systems. The dollar is used as a reference point for various countries since it is the preferred international reserve currency (Krugman, 2009). As a result, the change in status from a lender to a borrower due to global imbalances motivated these countries such as China to present capital to the U.S while they enjoyed the reference point of the dollar. Investment in various easily accessed areas such as the housing sector became a preference for most lenders. While the U.S saved the outflow of its capital, the lenders took advantage of the high incomes from the investments that had been purchased by most households. Consequently, lenders such as China took advantage of the situation and printed more of their currency that they would exchange for higher values of the dollar. The process has been stipulated by the monetary theory that explains more on the money supply, velocity, and reserve. Such developments can be considered as harmful to the borrower because of the presence of the cash deficit that can be used to rate an economys progress. As a result, most lenders such as China benefited from the capital flow and obtained resources that were used in the development of its economy with an aim to supersede the U.S economy. The global differences can be blamed on the surplus of savings in the U.S with fewer investment opportunities. Other causes for the global saving glut and their implications The pension deficit can also cause an increase in the savings depending on various factors. It occurs in cases where pension funding in retirees exceeds the number of workers (Bernanke, 2005). As a result, there is a low return on domestic investments since the workers do not provide enough to cater for the retirees. It can also be caused by high capital-labor ratios and declining workforces. Moreover, there is also the presence of non-financial corporation cash holdings that are used to store cash on behalf of the banks to cater for benefits. The approach is based on the monopoly of power where banks would have enough cash to supplement the trade imbalances. Conclusion The global imbalances will continue to exist due to differences in inflation, exchange rates, interest rates, and rates of investment. However, the levels can be balanced by the use of fiscal and monetary policies in order to prevent future current deficits. According to Bernanke, the equity market bubble is due to burst again if the cross-border lending is not regulated using the right policies. Reference List Bernanke, B. (2005), The Global Savings Glut and the US current account deficit, Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, VA. Borio, C. and Disyatat, P. (2011), Global imbalances and the financial crisis: link or no link?, BIS Working Papers no.346, Bank for International Settlements, Geneva Eichengreen, B. (2009), The financial crisis and global policy reforms, Federal Reserve Bank of San Francisco Asia Economic Policy Conference, October 18-20 Krugman, P. (2009). Revenge of the Glut. [online] Nytimes.com. Available at: http://www.nytimes.com/2009/03/02/opinion/02krugman.html?_r=0 [Accessed 18 Mar. 2015]. Read More