Skip to main content

Again with the "savings glut"?

I'm sure by now you've seen or heard Ben Bernanke's latest references to the global "savings glut", the phenomenon that is supposedly responsible for the fabulous demand for U.S. debt and low interest rates.

For those who are in the dark, here's a quick refresher, courtesy of Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said the ``global saving glut'' is still helping to keep interest rates low, and they may not rise much in the event that the pool of excess capital dwindles in coming decades.


While theory suggests that yields, adjusted for inflation, would rise as saving diminishes, ``factors other than the saving- investment balance affect long-term interest rates,'' Bernanke said in a speech in Berlin. ``We are again reminded of the need to maintain appropriate humility in forecasting.''


Nations such as China have invested the proceeds of trade surpluses in U.S. Treasuries, driving yields lower. China has a record $1.3 trillion of foreign-exchange reserves and household savings that amount to almost one-fifth of its economy. Investors abroad hold half of Treasuries outstanding, helping drive benchmark 10-year note yields down to 4.37 percent on average in the past five years, from 6.82 percent in the 1990s.


The theory of a global savings glut was first put forward by Bernanke in a March 2005 speech, which highlighted the shift that turned developing economies from "borrowers on international capital to large net lenders". Consequently, these now prospering nations were said to be holding down longer term interest rates through their outsized demand for U.S. government debt.


This line of reasoning led many to believe that interest rates were low because the global pool of savings was "too large".

But as I pointed it out in a previous article, due to the rampant increases of money and credit supply worldwide, the "savings glut" might more accurately be characterized as a liquidity glut.

Over the past few years, the money supply in most leading nations has increased every single year at a consistent, double-digit pace.

At the same time, leverage created through the financial system increased the availability of money substitutes and created an environment of greater liquidity and enhanced market participants' appetite for risk.

If there's been a glut of anything over the past decade, it's been cheap fiat money, much of it exchanged by the US for foreign bought goods. It works the same way anywhere across the globe; someone prints currency, puts it into circulation, then exchanges that money for goods and services at home and abroad.

All that money has to go somewhere, and this is how it works:


So, in the US recently, the money supply is growing at over 10% per year; in Europe the money supply is growing between 11 and 12% on an annualized basis; and in China the money supply is growing at an annual rate of 18%. So, there are a lot of people saying, “there’s just a glut of savings.”

Well, typically what happens is that through the US trade deficit, we buy goods from foreigners, say Chinese or Japanese, we pay them in dollars, those dollars get deposited in banks in Japan and China. They get converted into their local currency, either Japanese yen or the yuan. What will happen is central banks will come in and mop up those dollars because they don’t want their currencies going down, and then what they’ll do is turn around and sell their own currency and buy, let’s say, US Treasuries.


This idea of a savings glut, put forth by Ben Bernanke and endorsed by then Fed Chairman Alan Greenspan in 2005, is beginning to sound like the Fed's "big lie". Repeated often enough, it just may take on the appearance of truth to many observers.


Please read on for more commentary on this issue, from people who are far more knowledgeable than I am.


1. "Is There a Glut of Saving?" - Frank Shostak.


2. "The Fed's Wild Imagination" - Dr. Kurt Richebacher


3. FSN Big Picture 12-17-05 - Jim Puplava and John Loeffler discuss global money supply and the global "printing glut".

Popular posts from this blog

Lessons from Hedge Fund Market Wizards: Scott Ramsey

Today we continue our series, "Lessons from Hedge Fund Market Wizards" , with a look at Jack Schwager's interview with Scott Ramsey of Denali Asset Management.  Ramsey, a futures trader and CTA who works on the island of St. Croix, spoke to Schwager about his first foray into the markets, his evolution as a trader, and the process he stands by to protect and grow his clients' money. 1) . Ramsey started trading in college. He was roped into the OTC metals market via a broker's ad in the Wall St. Journal. The broker charged customers a flat fee to buy and sell as much as they wanted in a particular market for six month. At the time, Scott was a novice and didn't know about futures, so he traded metals in this fashion through the inflationary run-up of the late 1970s. 2) . Scott had to rethink his trading strategy after he bought silver at $50 an oz., only to watch it collapse to $26 following a long string of limit-down days. He sold as soon as the market...

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas.  Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas. In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn .  Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview: "Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda...

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi...