High-saving countries invest in the U.S. causing imbalances in global markets

Americans are often chided for spending too much and saving too little. However, Robert Samuelson argues that the opposite is true: people elsewhere are saving too much and spending too little. This is causing a dangerous imbalance in global markets.

Many nations with large savings rates do not invest all of it domestically. A large amount goes abroad, including the United States. For example:

In 2003, the French had $3.3 trillion of savings abroad, according to the International Monetary Fund.

In 2004, the Japanese saved 28 per cent of their national income and invested only 24 per cent at home – the rest went abroad, a lot to the United States.

The flow of surplus global savings to the United States causes Americans to spend more and save less. According to Samuelson:

In the 1990s, some of the savings surplus went into the U.S. stock market, boosting prices.

Currently, foreign funds are pouring into U.S. bonds and mortgages – keeping interest rates down, boosting demand for housing and increasing home values.

The rise in stock portfolio value and housing prices make Americans feel richer, encouraging them to spend more.

Consequently, the huge U.S. trade deficit is due to the rest of the world’s glut of savings. Increased American consumption sucks in imports, while weak foreign spending hurts American exports. In addition, converting foreign currencies into American dollars to invest here boosts the dollar’s exchange rate, making U.S. exports less competitive on global markets.

It is unlikely that the United States can fix the trade deficit unilaterally. Surplus savings are a result of poor domestic investment opportunities and government policies that discourage consumption.

Source: Robert J. Samuelson, The Global Savings Glut, Newsweek, April 21, 2005.

For text: http://www.msnbc.msn.com/id/7613508/site/newsweek/

For more on Trade Issues: http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 7 June 2005