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A GLOBAL ECONOMY OUT OF BALANCE

We are all taught that saving is good -- indeed, Americans are often chided for spending too much and saving too little. But what if the problem of today's global economy is that people elsewhere -- in Europe, Asia and Latin America -- are saving too much and spending too little? Former Princeton University economist Ben Bernanke argues that this is precisely the case. He calls it "the global savings glut."

The power of a good idea is that it dispels common confusions. Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery; and (c) the difficulty of doing anything about (a) and (b).

As a rule, saving is good. It helps individuals afford big-ticket items (a home, college tuition), protect against emergencies and prepare for retirement. For societies, it provides funds for productive investments in new factories, technologies and businesses.

In economics textbooks, a country's savings stay within its borders. Americans save in America, Germans in Germany. Also, savings automatically balance with new investment, mainly through interest rates and stock prices. If, for example, people want to save more than businesses want to invest, interest rates should drop. That encourages investment and discourages saving.

Unfortunately, the real world no longer mirrors the textbooks. In the 1970s and 1980s, most countries dismantled the "capital controls" that restricted their citizens from shifting funds into foreign stocks, bonds and companies. The amounts are huge: in 2003, the French had $3.3 trillion of savings abroad, reckons the International Monetary Fund. And no longer do saving and investment automatically balance within a country. For example: in 2004, the Japanese saved 28 percent of their national income and invested only 24 percent at home. The rest went abroad, a lot to the United States. Most Asian countries, including China, are high savers.

Generally, the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier -- because their stock portfolios had fattened -- Americans decided they could save less and shop more. Something similar has happened in recent years through the housing market.

Americans' low saving and high consumption offset foreigners' high saving and low consumption. The U.S. trade deficits result because our strong spending sucks in imports, while their weak spending hurts our exports.

What we have here is a giant and unplanned recycling mechanism. Up to a point, everyone benefits. Americans get cheap imports that hold down inflation; foreigners get a boost to their economies. But we have probably passed that point, and this global recycling could unravel in many ways. Foreigners may tire of investing in the U.S.; the dollar may drop on foreign-exchange markets, as it already has against some currencies. But if countries with savings surpluses can't consume or invest more at home, world growth would suffer. Or the U.S. recovery could falter. Trade deficits certainly help explain its precariousness.

Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States. Asian countries favor export-led growth, de-emphasizing local consumption. Latin America's volatile politics deters investment. Europe's heavy taxes and regulations do likewise.

Whatever the problems, Americans can't fix them. The common view that our budget deficits (which Bernanke correctly thinks should be reduced) cause our trade deficits is simply wrong. The two are only loosely connected. That unconventional conclusion is also inconvenient, because it measures our powerlessness.

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