The recent financial crisis and the following recession were rather surprising, but after that, the behavior of the world’s financial markets and industrialized economies has been even more so. The recovery has fallen unexpectedly and “significantly short of predictions and has been far weaker than its predecessors” (Summers, 2016, para. 2). The purpose of this paper is to provide the arguments for and a brief summary of Ben Bernanke’s theory of a savings glut.
For about seven years of the recovery of America, markets will probably not return to their normal conditions. There are several possible explanations for slow economic growth in advanced economies. According to Summers (2016), “the key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s” (para. 5). However, another explanation is proposed by Ben Bernanke and is known as the theory of a savings glut.
A global saving glut (GSG) is a certain situation in which the desired investment is exceeded by the desired saving. The creator of this theory, Ben Bernanke, is the Federal Reserve’s chairman, who argues that the non-financial corporate sector’s excessive saving is a permanent phenomenon, which has an effect on various countries. His theory states that America’s increased capital inflows from global saving glut countries are the reason why the U.S. 2003 to 2007 rates of longer-term interest were significantly lower than expected.
There is a number of logically articulated arguments proving the global saving glut hypothesis. First, the U.S. Federal Reserve’s monetary policy is rather appropriate before the financial crisis (Summers, 2016). Second, the connection between housing price appreciation and monetary policy is economically weak and statistically unimportant during this period (Summers, 2016).
Third, capital flows from reserve-rich countries are coped with by the monetary policy. From an economic perspective, the principal merit of saving is that it lets push spending forward. Moreover, if a savings glut is accompanied by higher productive investment, both the poor and the rich may benefit from productive investment.
Reference
Summers, L. H. (2016). The age of secular stagnation: What it is and what to do about it. Foreign Affairs, 95(2).