Low interest rates and the 'global savings glut'

Professor McKinney posted earlier in the week a portion of the internet debate between economic heavyweights, Ben Bernanke and Larry Summers. Ben Bernanke claims that the economy ultimately sets the interest rate and economies across the world are still recovering from the global financial crisis, therefore resulting in near-zero interest rates. Larry Summers, however, argues that the economy is experiencing secular stagnation due to reduced domestic investment and consumption from "fundamental factors" such as slowing population growth.

In a more recent blog post (link here), Ben Bernanke claims that the low interest rates are not a result of secular stagnation as Mr. Summers argues but instead of the "global savings glut". Bernanke explains that while the theories of secular stagnation and the savings glut have some similar results such as slowed economic growth, the root causes are different. Bernanke claims:


"Secular stagnation works through reduced domestic investment and consumption, the global savings glut through weaker exports and a larger trade deficit. However, there are important differences as well. As I’ve mentioned, the savings glut hypothesis takes a global perspective while the secular stagnation approach is usually applied to individual countries or regions. A second difference is that stagnationists tend to attribute weakness in capital investment to fundamental factors, like slow population growth, the low capital needs of many new industries, and the declining relative price of capital. In contrast, with a few exceptions, the savings glut hypothesis attributes the excess of desired saving over desired investment to government policy decisions, such as the concerted efforts of the Asian EMEs to reduce borrowing and build international reserves after the Asian financial crisis of the late 1990s."


Mr. Bernanke goes on to state that secular stagnation and the global savings glut hypothesis have very different policy repercussions as well. Bernanke states that with the global savings glut being the source of low interest rates, it is important to reverse the policies that are creating the excess savings.


Over the course of the spring we will be able to keep up with this debate about interest rates in the United States and globally while watching the actions of the Fed in order to analyze which theory they seem to believe.