323
See also: Financial services 26–29 ■ Economic bubbles 98–99 ■ Market integration 226–31 ■
Financial engineering 262–65 ■ Financial crises 296–301 ■ Housing and the economic cycle 330–31
Chinese, hands. It was this type of
feeling that made the explanations
of the 2008 global financial crisis
offered by US Federal Reserve
chairman Ben Bernanke so widely
appealing. He had developed his
argument from 2005 onward,
before the crisis really hit, and his
thesis focused on global imbalances
in savings and spending.
Central to Bernanke’s idea is
America’s balance of payments
(BOP). A country’s BOP is the
account of all money transactions
between that country and the rest
of the world. If a country imports
more than it exports, its trade
balance is in deficit, but the books
must still balance. The shortfall is
made up in some other way—for
example, by funds from foreign
investments or by running
down central bank reserves.
Bernanke pointed out that the
US deficit rose sharply in the late
1990s, reaching $640 billion, or 5.5
percent of GDP, in 2004. Domestic
investment remained fairly steady
at this time, but domestic saving
dropped from 16.5 percent of GDP
to 14 percent between 1996 and- If domestic savings fell
yet investment remained steady,
the deficit can only have been
financed using foreign money.
The savings glut
Bernanke argued that the deficit
was being funded by a “global
savings glut”—an accumulation
of savings in countries other than
the US. For instance the Chinese,
who have a huge positive trade
surplus with the US, were neither
putting all their American export
earnings into investment at homeCONTEMPORARY ECONOMICS
Since the closure of plants such
as this Chrysler factory in Detroit, the
US has been running trade deficits,
meaning that it has been importing
more than it has been exporting.
Savings gluts
abroad fuel
speculation at home.The savings in the
country in surplus are
borrowed in the country
in deficit, and this can fuel
financial speculation.The country in deficit must
fund its imbalance, while the
country in surplus can build
up a savings glut.If one country is importing
more than it is exporting
(in trade deficit), another
country must be exporting
more than it is importing
(in surplus).nor buying things; they were simply
squirreling it away in savings and
currency reserves. Bernanke
highlights a number of reasons
for the global savings glut besides
Chinese frugality, including the
rising oil prices and the building
up of “war-chests” to guard against
future financial shocks. ❯❯