Ben S Bernanke: The global saving glut and the US current account deficit
Remarks by Mr Ben S Bernanke, Member of the Board of Governors of the US Federal Reserve
System, at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, 10 March
2005.
The references for the speech can be found on the Board of Governors of the Federal Reserve System's website.
* * *
On most dimensions the U.S. economy appears to be performing well. Output growth has returned to
healthy levels, the labor market is firming, and inflation appears to be well controlled. However, one
aspect of U.S. economic performance still evokes concern among economists and policymakers: the
nation's large and growing current account deficit. In the first three quarters of 2004, the U.S. external
deficit stood at $635 billion at an annual rate, or about 5-1/2 percent of the U.S. gross domestic
product (GDP). Corresponding to that deficit, U.S. citizens, businesses, and governments on net had
to raise $635 billion on international capital markets.1 The current account deficit has been on a steep
upward trajectory in recent years, rising from a relatively modest $120 billion (1.5 percent of GDP) in
1996 to $414 billion (4.2 percent of GDP) in 2000 on its way to its current level. Most forecasters
expect the nation's current account imbalance to decline slowly at best, implying a continued need for
foreign credit and a concomitant decline in the U.S. net foreign asset position.
Why is the United States, with the world's largest economy, borrowing heavily on international capital
markets - rather than lending, as would seem more natural? What implications do the U.S. current
account deficit and our consequent reliance on foreign credit have for economic performance in the
United States and in our trading partners? What policies, if any, should be used to address this
situation? In my remarks today I will offer some tentative answers to these questions. My answers will
be somewhat unconventional in that I will take issue with the common view that the recent
deterioration in the U.S. current account primarily reflects economic policies and other economic
developments within the United States itself. Although domestic developments have certainly played a
role, I will argue that a satisfying explanation of the recent upward climb of the U.S. current account
deficit requires a global perspective that more fully takes into account events outside the United
States. To be more specific, I will argue that over the past decade a combination of diverse forces has
created a significant increase in the global supply of saving - a global saving glut - which helps to
explain both the increase in the U.S. current account deficit and the relatively low level of long-term
real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to
workers in a number of major industrial economies is one important reason for the high level of global
saving. However, as I will discuss, a particularly interesting aspect of the global saving glut has been a
remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that
has transformed those economies from borrowers on international capital markets to large net lenders.
To be clear, in locating the principal causes of the U.S. current account deficit outside the country's
borders, I am not making a value judgment about the behavior of either U.S. or foreign residents or
their governments. Rather, I believe that understanding the influence of global factors on the U.S.
current account deficit is essential for understanding the effects of the deficit and for devising policies
to address it. Of course, as always, the views I express today are not necessarily shared by my
colleagues at the Federal Reserve.2
The U.S. Current Account Deficit: Two Perspectives
We will find it helpful to consider, as background for the analysis of the U.S. current account deficit,
two alternative ways of thinking about the phenomenon - one that relates the deficit to the patterns of
U.S. trade and a second that focuses on saving, investment, and international financial flows.
Although these two ways of viewing the current account derive from accounting identities and thus are
ultimately two sides of the same coin, each provides a useful lens for examining the issue.
The first perspective on the current account focuses on patterns of international trade. You are
probably aware that the United States has been experiencing a substantial trade imbalance in recent
years, with U.S. imports of goods and services from abroad outstripping U.S. exports to other
countries by a wide margin. According to preliminary data, in 2004 the United States imported $1.76
trillion worth of goods and services while exporting goods and services valued at only $1.15 trillion.
Reflecting this imbalance in trade, current payments from U.S. residents to foreigners (consisting
primarily of our spending on imports, but also including certain other types of payments, such as
remittances, interest, and dividends) greatly exceed the analogous payments that U.S. residents
receive from abroad. By definition, this excess of U.S. payments to foreigners over payments received
in a given period equals the U.S. current account deficit, which, as I have already noted, was on track
to equal $635 billion in 2004 - close to the $618 billion by which the value of U.S. imports exceeded
that of exports.
When U.S. receipts from its sales of exports and other current payments are insufficient to cover the
cost of U.S. imports and other payments to foreigners, U.S. households, firms, and governments on
net must borrow the difference on international capital markets.3 Thus, essentially by definition, in
each period U.S. net foreign borrowing equals the U.S. current account deficit, which in turn is closely
linked to the imbalance in U.S. international trade.
That the nation's imports currently far exceed its exports is both widely understood and of concern to
many Americans, particularly those whose livelihoods depend on the viability of exporting and
importcompeting industries. The extensive attention paid to the trade imbalance in the media and elsewhere
has tempted some observers to ascribe the growing current account deficit to factors such as changes
in the quality or composition of U.S. and foreign-made products, changes in trade policy, or unfair
foreign competition. However, I believe - and I suspect that most economists would agree - that
specific trade-related factors cannot explain either the magnitude of the U.S. current account
imbalance or its recent sharp rise. Rather, the U.S. trade balance is the tail of the dog; for the most
part, it has been passively determined by foreign and domestic incomes, asset prices, interest rates,
and exchange rates, which are themselves the products of more fundamental driving forces. Instead,
an alternative perspective on the current account appears likely to be more useful for explaining recent
developments. This second perspective focuses on international financial flows and the basic fact that,
within each country, saving and investment need not be equal in each period.
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.4
All investment in new capital goods must be financed in some manner. In a closed economy without
trade or international capital flows, the funding for investment would be provided entirely by the
country's national saving. By definition, national saving is the sum of saving done by households (for
example, through contributions to employer-sponsored 401k accounts) and saving done by
businesses (in the form of retained earnings) less any budget deficit run by the government (which is a
use rather than a source of saving)5.
As I say, in a closed economy investment would equal national saving in each period; but, in fact,
virtually all economies today are open economies, and well-developed international capital markets
allow savers to lend to those who wish to make capital investments in any country, not just their own.
Because saving can cross international borders, a country's domestic investment in new capital and its
domestic saving need not be equal in each period. If a country's saving exceeds its investment during
a particular year, the difference represents excess saving that can be lent on international capital
markets. By the same token, if a country's saving is less than the amount required to finance domestic
investment, the country can close the gap by borrowing from abroad. In the United States, national
saving is currently quite low and falls considerably short of U.S. capital investment. Of necessity, this
shortfall is made up by net foreign borrowing - essentially, by making use of foreigners' saving to
finance part of domestic investment. We saw earlier that the current account deficit equals the net
amount that the United States borrows abroad in each period, and I have just shown that U.S. net
foreign borrowing equals the excess of U.S. capital investment over U.S. national saving. It follows
that the country's current account deficit equals the excess of its investment over its saving.
To summarize, I have described two equivalent ways of interpreting the current account deficit, one in
terms of trade flows and related payments and one in terms of investment and national saving. In
general, the perspective one takes depends on the particular analysis at hand.
As I have already suggested, most economists who have offered explanations of the high and rising
level of the U.S. current account deficit and the country's foreign borrowing have emphasized
investment-saving behavior rather than trade-related factors (and I will do the same today). Along
these lines, one commonly hears that the U.S. current account deficit is the product of a precipitous
decline in the U.S. national saving rate, which in recent years has fallen to a level that is far from
adequate to fund domestic investment. For example, in 1985 U.S. gross national saving was 18
percent of GDP, and in 1995 it was 16 percent of GDP; in 2004, by contrast, U.S. national saving was
less than 14 percent of GDP. Those who emphasize the role of low U.S. saving often go on to
conclude that, for the most part, the U.S. current account deficit is "made in the U.S.A." and is
independent (to a first approximation) of developments in other parts of the globe.
That inadequate U.S. national saving is the source of the current account deficit must be true at some
level; indeed, the statement is almost a tautology. However, linking current-account developments to
why
the decline in saving begs the question of U.S. saving has declined. In particular, although the
decline in U.S. saving may reflect changes in household behavior or economic policy in the United
States, it may also be in some part a reaction to events external to the United States - a hypothesis
that I will propose and defend momentarily.
One popular argument for the "made in the U.S.A." explanation of declining national saving and the
rising current account deficit focuses on the burgeoning U.S. federal budget deficit, which in 2004
drained more than $400 billion from the national saving pool. I will discuss the link between the budget
deficit and the current account deficit in more detail later. Here I simply note that the so-called
twindeficits hypothesis, that government budget deficits cause current account deficits, does not account
for the fact that the U.S. external deficit expanded by about $300 billion between 1996 and 2000, a
period during which the federal budget was in surplus and projected to remain so. Nor, for that matter,
does the twin-deficits hypothesis shed any light on why a number of major countries, including
surpluses
Germany and Japan, continue to run large current account despite government budget
deficits that are similar in size (as a share of GDP) to that of the United States. It seems unlikely,
therefore, that changes in the U.S. government budget position can entirely explain the behavior of the
U.S. current account over the past decade.
The Changing Pattern of International Capital Flows and the Global Saving Glut
What then accounts for the rapid increase in the U.S. current account deficit? My own preferred
explanation focuses on what I see as the emergence of a global saving glut in the past eight to ten
years. This saving glut is the result of a number of developments. As I will discuss in more detail later,
one well-understood source of the saving glut is the strong saving motive of rich countries with aging
populations, which must make provision for an impending sharp increase in the number of retirees
relative to the number of workers. With slowly growing or declining workforces, as well as high
capitallabor ratios, many advanced economies outside the United States also face an apparent dearth of
domestic investment opportunities. As a consequence of high desired saving and the low prospective
returns to domestic investment, the mature industrial economies as a group seek to run current
account surpluses and thus to lend abroad.6
Table 1. Global Current Account Balances,
1996 and 2003 (Billions of U.S. dollars)
Countries 1996 2003
Industrial 46.2 -342.3
United States -120.2 -530.7
Japan 65.4 138.2
Euro Area 88.5 24.9
France 20.8 4.5
Germany -13.4 55.1
Italy 39.6 -20.7
Spain 0.4 -23.6
Other 12.5 25.3
Australia -15.8 -30.4
Canada 3.4 17.1
Switzerland 21.3 42.2
United Kingdom -10.9 -30.5
Developing -87.5 205
Asia -40.8 148.3
China 7.2 45.9
Hong Kong -2.6 17
Korea -23.1 11.9
Taiwan 10.9 29.3
Thailand -14.4 8
Latin America -39.1 3.8
Argentina -6.8 7.4
Brazil -23.2 4
Mexico -2.5 -8.7
Middle East and Africa 5.9 47.8
E. Europe and the former
Soviet Union -13.5 5.1
Statistical discrepancy 41.3 137.2
Although strong saving motives on the part of many industrial economies contribute to the global
saving glut, the saving behavior of these countries does not explain much of the increase in desired
global saving in the past decade. Indeed, in a number of these countries - Japan is one example -
household saving has declined recently. As we will see, a possibly more important source of the rise in
the global supply of saving is the recent metamorphosis of the developing world from a net user to a
net supplier of funds to international capital markets.
Table 1 provides a basis for a discussion of recent changes in global saving and financial flows by
showing current account balances for different countries and regions, in billions of U.S. dollars, for the
years 1996 (just before the U.S. current account deficit began to balloon) and 2003 (the most recent
year for which complete data are available). I should note that these current account balances of
necessity reflect realized patterns of investment and saving rather than changes in the rates of
investment and saving desired from an ex ante perspective. Nevertheless, changes in the pattern of
current account balances together with knowledge of changes in real interest rates should provide
useful clues about shifts in the global supply of and demand for saving.
The table confirms the sharp increase in the U.S. current account deficit, about $410 billion between
1996 and 2003. (Data from the first three quarters of 2004 imply that the current account deficit rose
last year by an additional $140 billion at an annual rate.) In principle, the current account positions of
the world's nations should sum to zero (although, in practice, data collection problems lead to a large
statistical discrepancy, shown in the last row of table 1). The $410 billion increase in the U.S. current
account deficit between 1996 and 2003 must therefore have been matched by a shift toward surplus
of equal magnitude in other countries. Which countries experienced this change?
As we can infer from table 1, most of the swing toward surplus did not occur in the other industrial
countries as a whole (although some individual industrial countries did experience large moves toward
surplus, as we will see). The collective current account of the industrial countries declined more than
$388 billion between 1996 and 2003, implying that, of the $410 billion increase in the U.S. current
account deficit, only about $22 billion was offset by increased surpluses in other industrial countries.
As table 1 shows, the bulk of the increase in the U.S. current account deficit was balanced by changes
in the current account positions of developing countries, which moved from a collective deficit of $88
billion to a surplus of $205 billion - a net change of $293 billion - between 1996 and 2003.7 The
available data suggest that the current accounts of developing and emerging-market economies
swung a further $60 billion into surplus in 2004.
This remarkable change in the current account balances of developing countries raises at least three
questions. First, what events or factors induced this change? Second, what causal relationship (if any)
exists between this change and current-account developments in the United States and in other
industrial countries? Third, to the extent that the movement toward surplus in developing-country
current accounts has had a differential impact on the United States relative to other industrial
countries, what accounts for the difference?
In my view, a key reason for the change in the current account positions of developing countries is the
series of financial crises those countries experienced in the past decade or so. In the mid-1990s, most
developing countries were net importers of capital; as table 1 shows, in 1996 emerging Asia and Latin
America borrowed about $80 billion on net on world capital markets. These capital inflows were not
always productively used. In some cases, for example, developing-country governments borrowed to
avoid necessary fiscal consolidation; in other cases, opaque and poorly governed banking systems
failed to allocate those funds to the projects promising the highest returns. Loss of lender confidence,
together with other factors such as overvalued fixed exchange rates and debt that was both short-term
and denominated in foreign currencies, ultimately culminated in painful financial crises, including those
in Mexico in 1994, in a number of East Asian countries in 1997-98, in Russia in 1998, in Brazil in 1999,
and in Argentina in 2002. The effects of these crises included rapid capital outflows, currency
depreciation, sharp declines in domestic asset prices, weakened banking systems, and recession.
In response to these crises, emerging-market nations either chose or were forced into new strategies
for managing international capital flows. In general, these strategies involved shifting from being net
importers of financial capital to being net exporters, in some cases very large net exporters. For
example, in response to instability of capital flows and the exchange rate, some East Asian countries,
such as Korea and Thailand, began to build up large quantities of foreign-exchange reserves and
continued to do so even after the constraints imposed by the halt to capital inflows from global
financial markets were relaxed. Increases in foreign-exchange reserves necessarily involve a shift
toward surplus in the country's current account, increases in gross capital inflows, reductions in gross
private capital outflows, or some combination of these elements. As table 1 shows, current account
surpluses have been an important source of reserve accumulation in East Asia.
Countries in the region that had escaped the worst effects of the crisis but remained concerned about
future crises, notably China, also built up reserves. These "war chests" of foreign reserves have been
used as a buffer against potential capital outflows. Additionally, reserves were accumulated in the
context of foreign exchange interventions intended to promote export-led growth by preventing
exchange-rate appreciation. Countries typically pursue export-led growth because domestic demand is
thought to be insufficient to employ fully domestic resources. Following the 1997-98 financial crisis,
many of the East Asian countries seeking to stimulate their exports had high domestic rates of saving
and, relative to historical norms, depressed levels of domestic capital investment - also consistent, of
course, with strengthened current accounts.
In practice, these countries increased reserves through the expedient of issuing debt to their citizens,
thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and
other assets. Effectively, governments have acted as financial intermediaries, channeling domestic
saving away from local uses and into international capital markets. A related strategy has focused on
reducing the burden of external debt by attempting to pay down those obligations, with the funds
coming from a combination of reduced fiscal deficits and increased domestic debt issuance. Of
necessity, this strategy also pushed emerging-market economies toward current account surpluses.
Again, the shifts in current accounts in East Asia and Latin America are evident in the data for the
regions and for individual countries shown in table 1.
Another factor that has contributed to the swing toward current-account surplus among the
nonindustrialized nations in the past few years is the sharp rise in oil prices. The current account
surpluses of oil exporters, notably in the Middle East but also in countries such as Russia, Nigeria, and
Venezuela, have risen as oil revenues have surged. For example, as table 1 shows, the collective
current account surplus of the Middle East and Africa rose more than $40 billion between 1996 and
2003; it continued to swell in 2004 as oil prices increased yet further. In short, events since the
mid1990s have led to a large change in the collective current account position of the developing world,
implying that many developing and emerging-market countries are now large net lenders rather than
net borrowers on international financial markets.
Of course, developing countries as a group can increase their current account surpluses only if the
industrial countries reduce their current accounts accordingly. How did this occur? Little evidence
supports the view that the motivation to save has declined substantially in the industrial countries in
recent years; indeed, as I have noted already, demographic factors should lead the industrial countries
to try to save more, not less. Instead, the requisite shift in the collective external position of the
industrial countries was facilitated by adjustments in asset prices and exchange rates, although the
pattern of asset-price changes was somewhat different before and after 2000.
From about 1996 to early 2000, equity prices played a key equilibrating role in international financial
markets. The development and adoption of new technologies and rising productivity in the United
States - together with the country's long-standing advantages such as low political risk, strong property
rights, and a good regulatory environment - made the U.S. economy exceptionally attractive to
international investors during that period. Consequently, capital flowed rapidly into the United States,
helping to fuel large appreciations in stock prices and in the value of the dollar. Stock indexes rose in
other industrial countries as well, although stock-market capitalization per capita is significantly lower
in those countries than in the United States.
The current account positions of the industrial countries adjusted endogenously to these changes in
financial market conditions. I will focus here on the case of the United States, which bore the bulk of
the adjustment. From the trade perspective, higher stock-market wealth increased the willingness of
U.S. consumers to spend on goods and services, including large quantities of imports, while the strong
dollar made U.S. imports cheap (in terms of dollars) and exports expensive (in terms of foreign
currencies), creating a rising trade imbalance. From the saving-investment perspective, the U.S.
current account deficit rose as capital investment increased (spurred by perceived profit opportunities)
at the same time that the rapid increase in household wealth and expectations of future income gains
reduced U.S. residents' perceived need to save. Thus the rapid increase in the U.S. current account
deficit between 1996 and 2000 was fueled to a significant extent both by increased global saving and
the greater interest on the part of foreigners in investing in the United States.
After the stock-market decline that began in March 2000, new capital investment and thus the demand
for financing waned around the world. Yet desired global saving remained strong. The textbook
analysis suggests that, with desired saving outstripping desired investment, the real rate of interest
should fall to equilibrate the market for global saving. Indeed, real interest rates have been relatively
low in recent years, not only in the United States but also abroad. From a narrow U.S. perspective,
these low long-term rates are puzzling; from a global perspective, they may be less so.8
The weakening of new capital investment after the drop in equity prices did not much change the net
effect of the global saving glut on the U.S. current account. The transmission mechanism changed,
however, as low real interest rates rather than high stock prices became a principal cause of lower
U.S. saving. In particular, during the past few years, the key asset-price effects of the global saving
glut appear to have occurred in the market for residential investment, as low mortgage rates have
supported record levels of home construction and strong gains in housing prices. Indeed, increases in
home values, together with a stock-market recovery that began in 2003, have recently returned the
wealth-to-income ratio of U.S. households to 5.4, not far from its peak value of 6.2 in 1999 and above
its long-run (1960-2003) average of 4.8. The expansion of U.S. housing wealth, much of it easily
accessible to households through cash-out refinancing and home equity lines of credit, has kept the
U.S. national saving rate low - and indeed, together with the significant worsening of the federal
budget outlook, helped to drive it lower. As U.S. business investment has recently begun a cyclical
recovery while residential investment has remained strong, the domestic saving shortfall has
continued to widen, implying a rise in the current account deficit and increasing dependence of the
United States on capital inflows.9
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. One might ask why the
currentaccount effects of the increase in desired global saving were felt disproportionately in the United
States relative to other industrial countries. The attractiveness of the United States as an investment
destination during the technology boom of the 1990s and the depth and sophistication of the country's
financial markets (which, among other things, have allowed households easy access to housing
wealth) have certainly been important. Another factor is the special international status of the U.S.
dollar. Because the dollar is the leading international reserve currency, and because some
emergingmarket countries use the dollar as a reference point when managing the values of their own
currencies, the saving flowing out of the developing world has been directed relatively more into
dollardenominated assets, such as U.S. Treasury securities. The effects of the saving outflow may thus
have been felt disproportionately on U.S. interest rates and the dollar. For example, the dollar probably
strengthened more in the latter 1990s than it would have if it had not been the principal reserve
currency, enhancing the effect on the U.S. current account.
Most interesting, however, is that the experience of the United States in recent years is not so nearly
unique among industrial countries as one might think initially. As shown in table 1, a number of key
industrial countries other than the United States have seen their current accounts move substantially
toward deficit since 1996, including France, Italy, Spain, Australia, and the United Kingdom. The
principal exceptions to this trend among the major industrial countries are Germany and Japan, both of
which saw substantial increases in their current account balances between 1996 and 2003 (and
significant further increases in 2004). A key difference between the two groups of countries is that the
countries whose current accounts have moved toward deficit have generally experienced substantial
housing appreciation and increases in household wealth, while Germany and Japan - whose
economies have been growing slowly despite very low interest rates - have not. For example,
wealthto-income ratios have risen since 1996 by 14 percent in France, 12 percent in Italy, and 27 percent in
the United Kingdom; each of these countries has seen their current account move toward deficit, as
already noted. By contrast, wealth-to-income ratios in Germany and Japan have remained flat.10 The
evident link between rising household wealth and a tendency for the current account to shift toward
deficit is consistent with the mechanism that I have described today.
Economic and Policy Implications
I have presented today a somewhat unconventional explanation of the high and rising U.S. current
account deficit. That explanation holds that one of the factors driving recent developments in the U.S.
current account has been the very substantial shift in the current accounts of developing and
emerging-market nations, a shift that has transformed these countries from net borrowers on
international capital markets to large net lenders. This shift by developing nations, together with the
high saving propensities of Germany, Japan, and some other major industrial nations, has resulted in
a global saving glut. This increased supply of saving boosted U.S. equity values during the period of
the stock market boom and helped to increase U.S. home values during the more recent period, as a
consequence lowering U.S. national saving and contributing to the nation's rising current account
deficit.
From a global perspective, are these developments economically beneficial or harmful? Certainly they
have had some benefits. Most obviously, the developing and emerging-market countries that brought
their current accounts into surplus did so to reduce their foreign debts, stabilize their currencies, and
reduce the risk of financial crisis. Most countries have been largely successful in meeting each of
these objectives. Thus, the shift of these economies from borrower to lender status has provided at
least a short-term palliative for some of the problems they faced in the 1990s.
In the longer term, however, the current pattern of international capital flows - should it persist - could
prove counterproductive. Most important, for the developing world to be lending large sums on net to
the mature industrial economies is quite undesirable as a long-run proposition. Relative to their
counterparts in the developing world, workers in industrial countries have large quantities of
highquality capital with which to work. Moreover, as I have already noted, the populations of most of these
countries are both growing slowly and aging rapidly, implying that ratios of retirees to workers will rise
sharply in coming decades. For example, in the United States, for every 100 people between the ages
of 20 and 64, there are currently about 21 people aged 65 or older. According to United Nations
projections, by 2030 the population of the United States will include about 34 people aged 65 or over
for each 100 people in the 20-64 age range; for the Euro area and Japan, the analogous numbers in
2030 will be 46