Bernanke: Global 'saving glut' possible

[notiCIas]

Bernanke: Global 'saving glut' possible

Fed chief says nothing has disproven his belief that U.S. trade deficit may be partly driven by excessive savings.

March 24, 2006: 6:39 AM EST


WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said in a letter released Thursday nothing had emerged to undercut his year-old hypothesis that a "global saving glut" was a factor behind the large U.S. trade gap.

"Nothing has occurred since March 2005 to diminish support for the 'global saving glut' hypothesis, and the factors contributing to this 'glut' generally remain in place," Bernanke told Rep. Mark Kennedy, R-Minn.

The March 17 letter, released by Kennedy's office, was in response to a written question submitted in conjunction with a Feb. 15 hearing on monetary policy held by the House Financial Services Committee.

Bernanke said while the U.S. trade deficit widened last year, "the surplus of the developing economies is generally estimated to have widened as well."

"Much of the widening of the U.S. deficit and of the developing country surplus is attributable to higher oil prices," he wrote. "Additionally, U.S. economic growth again exceeded that of a trade-weighted average of industrial economies in 2005, thus continuing to support the relative attractiveness of investments in the United States."

Bernanke, who took office as Fed chairman on Feb. 1, had argued in a speech he delivered in March 2005 that an excess of saving relative to investment opportunities in the developing world had, in effect, washed ashore in the United States.

This "global saving glut," he said in that speech, "helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today."

He pointed to a number of factors that may have fueled a "saving glut," including a decision by developing Asian countries to build up foreign exchange reserves in the wake of the 1997-98 financial crisis and surging oil revenue in oil-exporting countries amid rising prices.

In a separate letter released Thursday, Bernanke told Rep. Harold Ford, D-Tenn., a reversal of these capital flows away from the United States, were it to occur, would not necessarily harm the U.S. economy.

"Should such a development occur, it might be associated with a decline in the value of the dollar and a narrowing of the U.S. trade deficit," Bernanke said in the March 21 letter.

But he added: "Neither of these events would be likely to threaten U.S. growth or boost inflation and interest rates to a worrisome extent."

No harm, no foul
The shortfall in the U.S. current account, the broadest measure of the nation's overseas trade, hit a record $804.9 billion last year, or 6.4 percent of U.S. gross domestic product. Many economists view the trade gap as a made-in-the-USA phenomenon, reflecting large budget deficits and consumers that cannot stop spending more than they earn.

In a speech Monday, Bernanke said the "saving glut" hypothesis was just one of a number of possible explanations for unusually low long-term U.S. interest rates.

In that speech, he assigned no greater weight to his hypothesis than to other potential explanations and concluded "the bottom line for (Fed) policy appears ambiguous."

His letter to Kennedy suggests, however, he may give his thesis somewhat greater weight than the other explanations, such as the possibility that the term premium investors demand to cover the risk of losses on long-term holdings had shrunk.

Bernanke said Monday that if the "saving glut" hypothesis were correct then "global equilibrium interest rates -- and, consequently, the neutral policy rate -- will be lower than they otherwise would be" as long as the factors behind the excess saving persisted.

The Fed has been raising benchmark overnight rates for 21 months hoping to get rates to a "neutral" setting before inflation erupts. Fed officials are expected to bump overnight rates up for a 15th straight time to 4.75 percent when they conclude a two-day meeting on Tuesday.