House of Paine

reeling like a drunken sailor

 DRINKING DOWN THE BOOZE
 IN BEN'S  
     YANK ALIBI BOTTLE

HAS MY PAL BRAD S STAGGERING 
        FROM LAMP POST TO LAMP POST 


==================================================





"Yet more on Bernanke and the savings glut
Created: Oct 28 2005

Brad DeLong seems to have dug up
 what Dr. Bernanke thought about 
fiscal deficits before he discovere
 the global savings glut ...  
namely, structural fiscal deficits 
tend to raise real interest rates"

 
---------- A TYPICAL CLOSED SYSTEM 
     CROWD OUT NARRATIVE FOLLOWS ----------

"Suppose the government increases spending
 without raising taxes,
 thereby increasing its budget deficit.... 
An increase in the government budget deficit... 
reduces public saving... 
[and] will reduce national saving as well....
 At the new equilibrium F',
 the real interest rate is higher at r',
 and both national saving 
and investment are lower... 
the government has dipped further into
 the pool of private savings 
to borrow the funds to finance its budget deficit... 
investors [must] compete
 for a smaller quantity of available saving
 driving up the real interest rate...
 mak[ing] investment less attractive
 assuring that investment 
will decrease along with national savin"


--------- THIS IS A FULL RUM BARRELL  INDEED ----------------------- 



--------- BUT THAT WAS BEN...
 THIS NANKE ---------------------

"In his savings glut speech
 Bernanke makes a slightly different argument
  The US fiscal deficit 
is all that stands between 
the US and even lower real interest rates
 and even more investment in housing
  Actually, the US fiscal deficit
 and the US consumer's willingness to spend 
is all that stands between
 an even larger savings glut 
(equivalently, a global shortage 
of consumption and investment)
 and even lower real interest rates 
around the world "

The key quote (emphasis added): 

"According to the story I have sketched thus far
 events outside U.S. borders
--such as the financial crises 
that induced emerging-
market countries to switch from being
 international borrowers to international lenders
--have played an important role 
in the evolution of the U.S. current account deficit
 with transmission occurring
 primarily through endogenous changes
 in equity values
 house prices, real interest rates,
 and the exchange value of the dollar"

Note the variable that Bernanke left out
 - namely the increase in the US fiscal deficit.


Bernanke's thesis (taken to its extreme)
 suggests that the US 
is doing the world a favor
 by spending so much 
and being so willing to borrow their funds;
 that implication 
- and the implication 
that US policies bear no responsibility
 for the rising US current account deficit 
- certainly bothers me. 

  I don't think today's US current account deficit
 is the simple respond to a shortage of spending abroad
 and would be the same irregardless 
of US fiscal policy choices

  Nor does borrowing abroad 
to finance fiscal deficits,
 high levels of consumption
 and investment in residential real estate 
obviously create 
the future export revenues 
needed to pay the interest 
on the United States' rising external debt".


"But Bernanke was responding
 to a real puzzle."

" As Dr. Altig notes:
 a shift from a structural fiscal surplus
 of maybe 0.5%  of GDP
 to a structural deficit of close to 3% of GDP
 according to standard models
 should have pushed up real interest rate 
and crowded out investment
 particularly in residential housing.
   It didn't. "

"The absence of higher real interest rates
 is what led Bernanke
 to postulate a global savings glut
 - a thesis that has now been refined 
into a "fall in investment relative to savings" 
outside the US, and particularly in emerging economies"


"And in some ways, 
it is not that different 
from the answer to the low interest rate puzzle
 that Nouriel, I and many others have put forward
 - a surge in reserve accumulation 
by emerging economies 
(with reserve accumulation defined broadly enough
 to include the investment funds
 of the big oil exporters). 

  As I never stop pointing out,
 private capital is pouring into emerging economies
 but by using this capital inflow 
to grow their reserves, 
emerging economies have chosen to use
 that capital to support 
the US government bond market
 (and in China's case, 
the mortgage backed securities market) 
- not to finance higher levels 
of investment or higher levels of consumption"


"I tend to emphasize 
that this reflects a policy choice
 and in some cases
 I think a policy error. "

" Bernanke 
- along with economists
 like Jonathan Anderson of UBS -- 
tends to deemphasize the role of policy
 or to suggest that this policy shift
 is a rational response
 in various ways
 to the 97-98 Asian crisis"

   Mike Dooley and his merry band
 go one step further,
 and suggest that financing 
the US is a rational development strategy" 


 


 


" I don't buy Bernanke's explanation 
for why reserve accumulation 
in emerging economies surged
 and think his thesis needs better explanation
 for why the surge in (net) private capital flows 
into China have not led to
 a fall in Chinese savings
   But I also give Bernanke real credit
 for focusing attention on the fact
 that the glut in "savings"
 relative to investment 
is primarily found
 in the world's emerging economies.


I cannot tell you how often
 I still hear pundits argue 
that access to US financial markets 
is the key to growth in emerging markets
 - even growth in China.  

 Right now, the opposite statement 
is more true
 - the US needs continued access
 to financing from emerging markets
 to sustain its own growth.

  That's right, financial stability 
in the US hinges on continued inflows
from emerging markets 
far more than financial development 
in emerging markets 
hinges on inflows from the US

  Bernanke, unlike many,
 recognizes this simple truth - 
and he also seems concerned about
 borrowing from abroad 
to finance home construction: 


Because investment by businesses 
in equipment and structures 
has been relatively low in recent years
 (for cyclical and other reasons) 
and because the tax and financial systems 
in the United States and many other countries
 are designed to promote homeownership,
 much of the recent capital inflow 
into the developed world 
has shown up in higher rates 
of home construction 
and in higher home prices

 Higher home prices in turn
 have encouraged households
 to increase their consumption

 Of course,
increased rates of homeownership
 and household consumption 
are both good things

 However, in the long run, 
productivity gains are more likely 
to be driven by nonresidential investment
 such as business purchases 
of new machines. 

The greater the extent 
to which capital inflows 
act to augment residential construction
 and especially current consumption spending
 the greater the future economic burden
 of repaying the foreign debt is likely to be'