Ben Bernanke is misguided about the 'global savings glut'

Earlier this week Ben Bernanke posted an article about the 'global savings glut' in order to combat the secular stagnation theory put forth by Larry Summers. Since then articles have been published discussing the short falls of Ben Bernanke's argument. One article in Business Insider is entitled "Ben Bernanke is wrong about his 'global savings glut' thesis" (link here).

In this article, Cullen Roche, claims that the basis of Bernanke's theory is really the loanable funds theory and the idea of crowding out. Roche states that "in essence, Bernanke is working from the view that savings drives investment rather than the reverse" and that this is essentially a "nonsense theory" as coined by Keynes.

Keynes "nonsense theory" states that: “The classical theory of the rate of interest seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another."

While the above is a somewhat jargon filled explanation of Keynes ideas, Roche simplifies it to say that "investment drives saving. It’s very common for financial “experts” and economists to argue that saving finances investment or that saving is the key to financial success. Although it’s an intuitively attractive framework (because we all think our quantity of savings finances everything) this is exactly backwards in the aggregate. Investment (not the financial type you’re probably aware of with regard to buying stocks and bonds) is spending, not consumed, for future production."

Keynes and Roche are therefore arguing that "investing adds to aggregate saving because one does not dissave in order to spend on investment. That is, when you invest you have an asset that is as valuable or more valuable than your prior savings PLUS someone else has your spending as their income. So investing drives saving." In the end, Roche argues that Bernanke's 'global savings glut' theory cannot be true because it perpetuates that idea that savings drives investment. 

I think this continuing debate over interest rates and the theory behind them (i.e. secular stagnation and the global savings glut) highlights how complicated these issues are outside of a classroom or textbook. In the real world there are more complexities that make something like setting the interest rate difficult.