US Bond Market Week In Review: The Global Savings Glut Is Alive And Well

Over the last few weeks, 2 central bankers have argued the “global savings glut” is a primary reason for low interest rates.In a speech on October 17th, Fed President Fisher commented:

Let me move now to the second major development on my list. In addition to its effects on labor force growth, the aging of the population is likely to boost aggregate household saving. This increase is because the ranks of those approaching retirement in the United States (and in other advanced economies) are growing, and that group typically has above-average saving rates. One recent study by Federal Reserve economists suggests that population aging–through its effects on saving–could be pushing down the longer-run equilibrium federal funds rate relative to its level in the 1980s by as much as 75 basis points.

ECB head Mario Draghi made a similar observation this week:

The second factor is a global imbalance of saving and investment, which has led real yields to fall even relative to growth prospects. On the saving side, a “global saving glut”, produced among other things by ageing populations, has bid up the price of safe assets at a time when the supply of those assets has been shrinking, thereby compressing real yields. Factors such as a decline in the relative price of capital goods have also led to a fall in desired investment.

Ben Bernake first advanced this idea in a speech on March 10, 2005. And although controversial at the time, it has now become a cornerstone of monetary policy discussion.

In the 2005 speech, Bernanke offered a then controversial explanation for the U.S. trade deficit. Rather than accept the conventional explanation that the deficit was a sign of a faltering U.S. manufacturing sector, he argued it was caused by an excess of global savings pouring into the U.S. seeking out higher returns.Here’s the key section from that speech:

In the United States, as in all countries, economic growth requires investment in new capital goods and the upgrading and replacement of older capital. Examples of capital investment include the construction of factories and office buildings and firms’ acquisition of new equipment, ranging from drill presses to computers to airplanes. Residential construction–the building of new homes and apartment buildings–is also counted as part of capital investment.