Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive.
Indeed, the entire Savings Glut meme is more of a semantic game than anything else. In the hands of lesser proponents than Bernanke (and Columbia Prof /Clinton Group Economist Richard Clarida), it might appear to be intellectually dishonest; By saying it fails intellectually, I am being "generous" by giving both men the benefit of the doubt.
"Oh, meltdown. it’s one of those annoying “buzzwords." We prefer
to call it an unrequested fission surplus."
You read that right: macro-economic analysis via the Simpsons. Here’s how Monty would break it down:
Unrequested fission surplus = Nuclear Meltdown (Buzzword)
Savings Glut = trade deficit, current account deficit, federal budget deficit, zero savings rate (more Buzzwords)
Dan Gross, who’s financial columns are consistently amongst the most thought provoking and interesting I read today, gets
the reasons for the structural global imbalances exactly right:
"Why are there imbalances in the global economy? Until recently, conventional economic wisdom has held that the U.S. has a huge trade deficit, a gaping current account deficit, and large federal budget deficits because Americans consume too much and save very little.
In Gross’ view, the Glut is a self-serving explanation for all of America’s bad habits.
Hence, my own thoughts that this is as much semantics as it is economic theory. While that helps settle the issue for me, others may want some more details:
1) The Savings Glut argument is a defense of a
structural imbalance via a mostly painless solution, rather than the difficult
medicine (most adults) know are necessary to cure the problem. A spoonful of Sugar won’t help eliminate the problem.
2) Much of the rest of the world has very different priorities and social structures — they often look askance at what is called "excessive consumption" in the U.S.
Consider Europe: Their culture has much longer vacation time than the U.S., shorter
working week (by hours), and much of the Summer off. While they have their moments, they are not remotely the consumer
society we are. For us to suggest that Europeans need to start consuming much more
stuff only reflects an unrealistic understanding of the Continent; That’s why it generates guffaws;
3) The US savings rate is almost nonexistent; I find it exceedingly difficult
for us as a stone cold drunk to lecture others on the virtues of either fine wine or being a teetotaller;
4) Then there’s the "careful what you wish for" factor: What would
happen if the rest of the world suddenly decided to go on a spending spree,
racking up big debts, rather than buying our bonds?
See also: Brad Setser has a robust critique of the Bernanke global savings glut speech. Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut is a self-serving explanation for America’s bad habits, Setser goes on to list 5 major criticisms of the Savings Glut theory. The two nice things he said was little more than a polite coda, IMHO
Here’s a fascinating look at "The Maestro" via the lens of the WSJ, circa 1987:
"A specter from the past has been haunting the stock market lately, and,
as with most specters, the question is whether this one is mostly real
or mostly imaginary.
The specter is inflation, and until recently, many investors thought it
was dead and gone. Lately, if you believe the Federal Reserve, it isn’t
exactly ba-a-a-a-ck, but it is lurking. The Fed’s fear of inflation,
together with its clear intention to keep raising U.S. short-term
interest rates to keep inflation in check, is the main thing that has
prevented the much-awaited fourth-quarter stock rally from commencing . . .
A few weeks ago, I gave Professor James Hamilton grief over his 45 year chart of the 12 month change in CPI (1960 – 2005). The very long chart, IMHO, makes inflation look more modest versus its long history than say a 5 year chart would.
Indeed, the impact of any longer term charts is that they make major events look like ripples; You can barely see the 1987 crash on a long SPX chart, and even 9/11 is hard to spot on a 10 year Nasdaq chart.
Today’s WSJ also uses a long term chart — 35 years of CPI and Core CPI. It presents a case that the core underreports inflation. Note that even during the late 1970s peak of CPI, the Core rate tracked the overall index; In 1972-74, however, the Core lagged the CPI appreciably.
That lag is very analogous to the present BLS reporting, and in my opinion, why the Fed is fighting inflation so aggressively.
Note: I modified the WSJ chart, zooming in on the two periods:<spacer>
click for larger chart
Chart courtesy of WSJ
The entire article is worth reading; I have more excerpts, and the original chart, after the jump.
Specter of Inflation Haunts Dow
While Waiting for Fed’s Fears To Subside, Investors Pull Back, Imperiling an Anticipated Rally
THE WALL STREET JOURNAL, October 24, 2005