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Investment dearth, not savings glut

April 10, 2005

There is a interesting article in the latest issue of The Economist. As most people here know, the national savings rate in America is now at its lowest level since the Great Depression. What is perhaps less known is the fact that savings have been falling in the other large rich countries too. While the savings rate of for example Japan is still higher than in America, savings have been declining even faster in Japan than in America. Moreover, the rest of Asia (with China being the conspicuous exception) have also seen a large decline in savings.

The decline in Japanese savings may surprise some people given the fact that Japan has a large trade- and current account surplus, but the decline in savings have been more than matched by an even greater collapse in investments, unlike in America where the declining savings rate have been compensated by a large capital inflow (aka current account deficit). Not surprisingly, the collapse in domestic investments in Japan has led to a long period of stagnation, just like in Germany where investments have also fallen sharply. It is therefore wrong to assert,as Ben Bernanke did, that the world has a "savings glut". It would be more accurate to describe it as "investment dearth", with particularly business investments being at too low levels, something which is also evident in the high level of corporate profits in America and most other countries.

There are of course some people who argue that the national savings rate underestimate true savings since education is not counted as investment, even though it (hopefully) will improve productive capacity. That is basically a true point, but taking that into account will neither really change the basic picture of savings in America and elsewhere being at historically low levels or the fact that America even taking that into account has a lower savings rate than the rest of the world.

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