Current Accounts

De-glutting

As interest rates fell around the globe during the years leading up to the global financial crisis, one of the most popular explanations was the savings glut hypothesis. This was the idea (popularised by Ben Bernake) that current account surpluses (i.e. the excess of domestic savings over domestic investment)  from China and other East Asian countries was putting downward pressure on global interest rates.  Indeed,East Asian net savings (in addition to those of Germany) did rise quite dramatically during the years leading up to 2008 and interest rates did fall. 

But in the last few months, something interesing seems to be happening. Now the current accounts of China and Japan have begun to decline sharply. WhileTH has never been a big fan of the savings glut hypothesis (he prefers the dearth of investment argument — popularised by Raju Ragan), he can’t help wonder what the implications for global interest rates might be.

 

Source: IMF WEO

 

It seems to TH that the the advanced economy world is, generally speaking, not well prepared for a rise in interest rates right now. The US government with net debt at around 70% of GDP has already be downgraded ratings agency Standard and Poors, and 15 Euro area governments have been put on notice that they might be downgraded (including France  (80% of GDP) and Germany (60% of GDP)). The Australian government with net debt of around 7% of GDP looks better positioned than its G7 cousins.

 

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