account deficit, it has a number of shortcomings because it is inconsistent with some other developments we observe in the global economy. for an explanation to have any plausibility, it must be consistent with all the five simultaneous developments listed above. in my view, the most promising explanation at present is one which starts with the surplus countries and focuses on why national savings are so much higher than national investment in those countries. 2 see mann ( 1999 and 2002 ), obsfeld and rogoff ( 2000 and 2004 ) and peterson ( 2004 ). ben bernanke, while a governor of the us federal reserve board, gave the best explanation along these lines. he originally called it the “ glut of savings ” argument, but it could more appropriately be called the “ dearth of investment ” argument because there has not really been an increase in world savings, only a redistribution. alternatively, we could call it the “ glut of savings in surplus countries ” argument. see bernanke ( 2005a, 2005b ). 1 / 10 although it is not, in itself, a complete explanation of everything that has happened, it is the most plausible in that it is consistent with all the five developments listed above. 2. the excess of savings in the surplus countries the best starting point for any explanation is to recognise that there is a wide disparity between saving rates in different countries. broadly speaking, asian countries tend to have high saving rates, anglosaxon ones low saving rates, and other countries somewhere in between ( row 1 of table 1 ). for balance of payments purposes, this would not matter if investment rates in each country matched the saving rate, but this is not the case ( row 2 of table 1 ). in countries with high saving rates, investment rates, while high, are not as high as the saving rate, and these countries run a current account surplus. the opposite applies in the low saving countries. to understand developments in current accounts, we have to understand developments in saving and investment ratios in different countries and regions. in short, asian countries have more savings than they wish to invest in their own countries, and so they have to invest or lend abroad. this is the most basic of all balance of payments identities. other countries that invest more than they save have to finance their investment by using the savings of foreigners. the actual channel can take many forms, but that is not crucial to the story. to complicate the story slightly,

i j macfarlane : what are the global imbalances? speech by mr i j macfarlane, governor of the reserve bank of australia, at the economic society of australia dinner, melbourne, 28 september 2005. * 1. * * introduction i have given a number of speeches to the economic society over the years, and it is a pleasure to be doing so again tonight. the last time i gave the closing address to the conference of economists was in 1997 in hobart. the subject i want to speak about tonight is one which has loomed particularly large in international macro - economic discussion in the period since then. i refer to the subject of global imbalances in international payments. most of the discussion, at least until quite recently, focussed on the large us current account deficit and questioned its sustainability and the risks it posed to the world economy. tonight i would like to approach the subject of global payments imbalances from a broader perspective. in doing so, the focus of attention is shifted towards asia, recognition is given to the weakness of europe, and the united states is cast into an accommodating role, rather than an initiating one. when we look at the global economy over the past half dozen years, there are a number of developments that have been difficult to satisfactorily understand and explain. i suggest that the following five developments are the central ones in need of an explanation. 1. why did the us current account deficit start to widen sharply after 1997, reach such a high percentage of gdp, and yet has been relatively easily financed? 2. why has asia run such large current account surpluses and built up such a high level of international reserves? 3. why did the world's central banks push short - term interest rates to their lowest level for a century, and why has this apparently easy monetary policy not led to an appreciable pick - up in inflation? 4. why have bond yields been so low, and why have they stayed low even when short - term interest rates have been raised? 5. against this background of wide payments imbalances, why have the margins for risk in corporate and emerging market debt been so exceptionally low? a number of explanations have been put forward to account for each of these developments. the most common explanation has started with the widening us current account deficit, and attributed it mainly to excessive spending and borrowing and insufficient saving by us households and the us government. 1 while this explanation is consistent with the widening us current