The increasing attention paid to growing U.S. current account deficits has bred nightmare scenarios of a sharp decline in the foreign-exchange value of the dollar and rising U.S. interest rates.
Financial markets, by contrast, appear more sanguine. Inflation-indexed bonds in the U.S. are yielding only about 1.5% in real terms, and the IMF's estimate of the long-term world real interest rate is about 2%.
Glenn Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush,
Wall Street Journal, 23/6 2005
Many economists' thinking about savings imbalances harkens back to Keynes's "paradox of thrift." In "The General Theory of Employment, Interest, and Money," he reasoned that what seems sensible for an individual may be bad for the economy as a whole. It is possible for the private sector's desired saving to exceed its desired investment. This intuitive argument has not gone out of fashion, with discussions of a "global savings glut" appearing in official and journalistic reviews of the bond market and the economy. And levels of global savings from emerging economies are, indeed, high.
Herb Stein was right that "if something cannot go on forever it will stop."
American leadership has rightly questioned European economies' emphasis on safety, with high social spending and inefficient markets for risk-taking limiting demand growth. But the bigger immediate challenge is to address the imbalance of saving and investment in international capital markets by encouraging the development of efficient banking and securities markets.