Economists blame 'global savings glut' for destabilized markets

Wall Street’s downward slide appeared to have slowed on Wednesday after three days of short-lived highs and precipitous lows. But a tentative end to the market’s volatility has not soothed the anxiety of many economists, who believe that the global financial system has yet to find stable footing after the 2008 economic crisis due to an excess of savings and dearth of investments.

This week’s financial panic was triggered by the nosedive of China’s stock market on what is now being called “Black Monday.” But the more lasting fear may be what then-Federal Reserve head Ben Bernanke described in 2005 as a “global savings glut."

A savings glut takes place when investors decline to put their money toward productive activity such as new business ventures, perhaps because they don’t expect a likely return from such investments. Instead they invest in low-risk, high-yield products such as U.S. treasury bonds.

Many experts believe the U.S. economy is currently stuck in the following cycle: Speculators, wary of potential investments in the United States, become very enthusiastic about the expected returns from opportunities abroad. As a result, they help to inflate speculative bubbles in foreign markets; then, once those bubbles no longer appear sustainable, they retreat back to U.S. Treasury debt.

Nobel Prize-winning economist Paul Krugman raised that possibility in a Monday column for the New York Times, in which he cited Bernanke’s warning of a “global savings glut” and urged policy makers to “take seriously the possibility, I’d say probability, that excess savings and persistent global weakness is the new normal."

Mark Weisbrot, co-director of the Center for Economic and Policy Research, said poor fiscal policy in the United States and the European Union deserves some of the blame.

“The reason you have this savings glut is because the governments of the two biggest economies in the world haven’t stepped up to the plate and done their job to ensure something at least reasonably close to full employment, so you have insufficient aggregate demand,” he said. “When there’s a lack of aggregate demand, investors don’t want to invest that much in productive activity because they don’t see a market for it."

That lack of investment, in turn, can be a drag on job creation and wage growth according to Roosevelt Institute senior economist Adam Hersh.

“It’s not just that there’s so much savings, but also that people are not looking for opportunities to make real investments with those savings, which then leads to neither growth, nor employment, nor wage growth around the world,” said Hersh. “It’s a kind of second order effect that the situation can help contribute to rising inequality."

Joshua Mason, an economist at John Jay College in New York, argued that the cycle of excessive savings and inflating bubbles did not start with the great recession — instead, it goes back much further.

“For 30 years, we’ve seen this rolling crisis moving from one part of the world to another,” Mason told Al Jazeera. “Every few years, there’s been this financial crisis in one part of the globe or another."

Mason cited the 1994 Mexican peso crisis and 1997 Asian financial crisis as examples. “What’s unique recently is that the rich countries have also been subject to these kinds of crises,” he said.

A handful of factors are to blame for these crises, according to Mason, including the ability of capital to move across national boundaries without impediment, and the freedom of investors to act on rapidly shifting beliefs regarding the health of particular investments and national markets.

To add to the danger, “there is no central source for means to settle international debts, no lender of last resort,” Mason wrote in an e-mail. As a result, debtors who can’t access additional loans can find themselves forced to take extreme measures — including, in the case of some debtor states like Greece, extreme austerity — in order to meet their loan payments.

“You don’t have any central official source to get dollars to pay the loss, so you have to put your economy through the ringer to make those payments,” said Mason.