Why are interest rates so low (III)*

17 aprile 2015 michele boldrin e Carlos Garriga

Some days ago Bernanke published the third piece in the series, where he begins to outline his explanation of why interest rates are so low. Not surprisingly, his first suspect turns out to be "Global Savings Glut", an argument he has been pushing for at least a decade. Nothing new under the sun and nothing really convincing. 

The starting point for BB's argument is one of the observations making secular stagnation an unconvincing explanation: we live in a globalized economy, hence, if really there are no profitable investment opportunities around, this must be true not just in the US or the EU but also everywhere else. Because 3/4 of the world is still quite "underdeveloped", proponents of the Secular Stagnation Story (SSS) should actually show that profitable investment opportunities are fewer even at a global level, which is quite hard to do. 

This is all fine but: do Bernanke and the supporters of the Global Savings Glut (GSG) realize that their argument is, at the end, just the mirror image of the SSS? Apparently not, but let us proceed orderly. Bernanke's argument is as simple as it gets.

1)  The propensity to save of a number of emerging economies (China first and foremost, but not only) increased after the financial crisis of the late 1990s (as an effect of a number of policies adopted by those countries) while investment opportunities there and everywhere else in the world have not changed.

2) This shift to the right in the global supply of savings, absent a balancing equal shift in the same direction of the global demand for investment funds, implies that the equilibrium interest rate is lower now than it was before the late 1990s.

3) End of story, at least for now. A fourth piece looks deeper at the determinant of interest rates and we will comment on it in a few days. 

In support of this argument Bernanke reminds us of articles he wrote back in 2005 and 2007 in which he attributed the large (and increasing until early 2007) deficit of the US current account to the dramatic increase in the flow of savings coming from outside the US, and from Asian and developing countries in particular. He explicitly claimed a leading causal role to the capital flows: they caused both large imbalances in the current accounts of developed countries (the US in particular) and the decrease in long term rates.

Notice first that, once stated as global phenomena, the GSG and the SSS cannot be told apart. In the data, because of logical and accounting reasons, S=I always holds: all we can see is that the amount traded increased/decreased together with the equilibrium price. Certainly, if (as a % of GNP) the amount traded had increased dramatically while its price had clearly dropped, one could conclude that, with high probability, this was due to a shift of supply along the demand curve. But, as we will see later, this is not the case in the data. All we know is that some real rates of interests have been decreasing now for more than a decade, while other have not (this fact we will document in the next post, to avoid making this one longer than it should be). This fact, at best, tells us that in some markets the relative movements of demand and supply of funds have lowered the price at which those funds are traded, which is exactly what we are trying to explain: some interest rates are lower than they had ever been. At this level the two competing hypotheses are one and the same: a restatement of the puzzle, two identical but differently phrased, tautologies.

That the GSG and the SSS may in fact be the same thing is also noted by Bernanke who, nevertheless, hastens to argue that the SSS is often stated only at the country level, and only for some countries, while his hypothesis is global. This is true but it seems more a limit of those that formulated the SSS than of the idea in itself, which has a much clearer formulation as a global hypothesis. Secondly, Bernanke adds, GSG and SSS are different because the first identifies some specific policies as its causes and, therefore, prescribes either changes in those policies or other interventions as solutions. The SSS, on the other hand, only advocates "expansionary" fiscal policies (in the EU, Japan and the US) to address to a problem that is, according to its proponents, structural and due to shifting fundamentals. This is true but, again, it is only due to the particular lack of imagination of one or the other contender. It is very easy to come up with a list of policies negatively affecting investment opportunities in the developed world (this blog contains dozens of articles doing just that for the EU and other countries) while, at the same time, claiming that the alleged GSG is due to shifts in fundamentals - the demographic transition in China and other developing countries being the simplest example. In other words: they are the same things and the factor that allegedly "explain" them are the same.

Said all this, let us take a quick look at the evolution over time of the actual saving levels in the major economies. We do this with three simple graphs, constructed using World Bank data.

In the first we report an estimate of global saving rates around the world. The overall trend, if anything, is decreasing.



Here is the gross saving rates for the eigth main players. 


And here, for the six advadvanced countries, the household saving rates. 



The data have limitation but they show, unambiguosly, that there is no global explosion of the amount of savings relative to GNP. If anything, each one of the three graph shows a decline in savings with respect to aggregate income, especially at the level of the households. Even in China, the global outlier, total savings as a % of GNP are constant since 2006-07. If we combine this data with the observation about interest rates, that they have decreased for more than a decade and further since 2007, we would conclude that the equilibrium point has moved along the supply curve: lower prices and slightly lower quantity. This would lend support to the SSS not to the GSG hypothesis but, as we have seen in the previous post, all the evidence shows that the SSS does not hold water, at least globally. 

Let us next take a look at the data Bernanke claims to be supportive of his theory. In a table of his post he also does that but, contrary to what we believe the numbers to show, he insists that the global saving glut is still there because the Euro area, and Germany in particular, are running large current account surpluses for lack of internal demand due to cyclical conditions. His final take is pretty surprising, though, as he states that

When the European periphery returns to growth, which presumably will happen at some point, the collective surplus ought to decline. 

This leaves us a bit puzzled: given that total imbalances dramatically decreased since 2006-07 should we really think that the continuing drop of real interest rates on public debt is due to the increase (of about $80 billion!) in Germany's trade surplus? This seems hardly the case given that, for example, the very same data shows that the trade surplus of the emerging economies dropped of more than $ 300 billion during the same period of time! Still, Bernanke, in a subsenquent post, seems to claim this is the case. We have no idea how Ben Bernanke's algebra works but the numbers do not add up.

Further, in the post just linked he seems to attribute the German's trade surplus to the euro and to particularly restrictive German policies. This is odd. First off: all that surplus was built up while the Euro was "overvalued" and, as Bernanke reminds us, it has been devaluing for about a year or so. Should we then invoke higher interest rates and a more restrictive monetary policy in the Euro area to reduce Germany's trade surplus through a revaluation of the Euro? Is it really the Euro? How about Sweden, then (just to name one random example outside the Euro area)? Its current account balance has been improving substantially since 2004, still its exchange rate, against the dollar at least, has oscillated wildly during that period (the Kronor was particularly strong when the trade surplus started to improve), its internal demand (as proxied by public consumption) has not moved off a steady growth line (hence, no particular evidence of restrictive fiscal policy there), Swedish M3 has been growing happily (same for M1 and M2) and so on and so forth ... How does this work, then? 

On the side of "policies" Bernanke claims 

Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports.

well, here are all the data about Germany you may need. If you find hard evidence of any particular lack, or drop, in internal German demand (either private or public) please let us know. We have not found it. 

Said that, let us add a few more data about trading account balances to put Bernanke's table in a time perspective.

A quick look at the US current account balance shows a dramatic improvement since 2007 (even more as a share of GDP) with the opposite movement for those China and Japan. Similar adjustments have taken place in most other countries (with the notable exception of Germany, which is nevertheless not large enough to compensate the drop elsewhere, as we already observed), thereby reducing global trade imbalances (hence, capital flows) quite substantially. This reversal has been going on for almost seven years now and, still, long term interest rates, in the US, Japan and the Euro area remain low, in fact lower than at the time Bernanke's first advanced the GSG explanation. After such a long time to continue attributing the low rates to trade imbalances that have mostly disappeared seem, to us, more an act of stubborness than anything else.

* The views expressed are those of the authors and not necessarily of the Federal Reserve Bank of St. Louis or the Federal Reserve System 

22 commenti (espandi tutti)


Stradivari 17/4/2015 - 22:13

Ciao Michele,

Interesting post, thanks. Btw, you guys sure about the household saving rates (% of GDP) you show? To me, at least the Italian figures look a bit odd (too low). Here is the official ISTAT estimate (which is around the double of what you show): http://www3.istat.it/dati/catalogo/20110523_00/grafici/4_1.html

But again, nice post (and I don't think my comment might change your point but maybe it's worth checking).


Judging from the scale of the vertical axes on the chart above, it might be $, not %gdp, in which case the two charts look more or less consistent.

la nostra fonte e' OECD ma, soprattutto, riportiamo net not gross savings.

More later perche' ora vado di fretta.

Household savings 12,000% of GDP sembra eccessivo, no?

Valutando la risposta di Michele (sotto) puo' essere che quella virgola sia in realta' un punto.

Ergo, quel 12,000% sia da leggere come 12.0%.

Scusate, completamente OT. Potreste scrivere qualcosa sul TTIP?



se è un parolaio che abbocca agli slogan, prova a dirgli che finalmente potremo vendere il prosciutto di Parma in america, america e prosciutto sono termini sufficientemente familiari. puoi rincarare con: " la discriminazione nei confronti dei nostri sublimi maiali deve FINIRE!!!!!!" etc.


Giacomo Monari 18/4/2015 - 17:50

Quasi! Poi mi interessa sapere cosa ne pensa NfA, indipendentemente dalle mie calcagna. Comunque proverò anche il tuo metodo!


Franco Verzetti 27/4/2015 - 08:57

che il M5S non suscita in me particolari emozioni, temo che la faccenda sia un po' più complicata, ma credo anche che siamo off topic quindi mi fermo qui.

I’m trying to understand the global saving theory: A man in Germany has a lot of money, he received it from the exportation of Bmw’s cars, this man has picked up his money and he has bought some bonds, instead of buying the new iphone 6, so interest rate has gone to low, Bernanke has now said that the German government, that received this money, must spend it to increasing the global demand, is it this the theory ? Or i didn’t understand nothing ?

The rich German (who, let us assume, is the 100% owner of the BMW company) did not just buy any bonds, but in fact US, Chinese and other bonds denominated in the currencies that the company exports to.  For this reason he is lowering the interest rate in those countries. A solution is for him to pay his employees more so that: the company makes less profits and his workers can buy more foreign and German goods (including BMW cars, by the way). If German workers already have all the income they need (!?)  then the German govt could instead borrow some of the rich man's money and spend it, but that is a less desirable solution. Any other policies that reduce the German current account surplus would also be welcome, [such as encouraging the purchase of USA/China made smartphones] (but to all my German friends a big surplus is a matter of national and personal pride! and rasing wages seems like the first step to hyperinflation to them ).

But this wage increase is happening to some extent.

Thank you very much Alex, Bernanke didn't convice me about this i do not think that german employees are under wage and the german companies make so big profits, 53% of world's bonds have a yield lower than 1%(BofA) numbers in play seem too different, maybe the  world's central banks can do this... clearly in my probably wrong view ;-)

Thanks to Stradivari for pointing out the issue and to Nicola Rossi (a student at Bocconi University in Milano, who is helping as an RA for the data) for his help here and with the savings data.

The time series we use is from OECD and can be found here.

The data from ISTAT that Stradivari posted are for GROSS household savings, while the OECD (and us) report the NET, which is defined as
Net household saving is defined as the subtraction of household consumption expenditure from household disposable income, plus the change in net equity of households in pension funds. Household saving is the main domestic source of funds to finance capital investment, a major impetus for long-term economic growth. This indicator is measured as a percentage of household disposable income. Data are under System of National Accounts (SNA 1993) for all countries except for Australia and United States (SNA 2008).
We cannot say for certain that the whole difference between the two series can be explained by the loss of value in Italian pension funds during the period, which should nevertheless be substantial given how Italian financial markets have been performing in recent years. The depreciation of the housing stock may also play a role and we are trying to figure out if technical information can be found to fully account for the differences.

In any case, it is clear that gross vs net explains most of the discrepancy and that net, not gross, saving is the relevant variable in this context.

There also some minor differences between the current OECD series and the one we use for the last couple of years, which may be due to revisions introduced since we first downloaded the data from OECD.

Thanks Michele, I think it makes sense.

Btw, I think Andrea in his first comment got confused by the use of the "," (rather than the ".") on the vertical axis (I guess Nicola Rossi is using Excel with European preferences set up). Also, the figures (both, OECD and ISTAT) refer to households savings as a share of disposable income, not GDP (I know, maybe the difference is not huge.. (is it? not sure here) but worth checking or changing the title of the chart).

Again, thanks for the nice contribution and sorry for being so picky!



marcodivice 21/4/2015 - 15:54

very interesting post. Do you have any idea of what is going on? To me seeing 10yrs bund heading to negative or being paid to get loan it's really weird, but I have no idea about the cause. My guess it's aging and no trust in the future, but it's only a guess.

i risparmi mostrati qui sono intorno al 10% del PIL (con China al 20% che sposta il dato aggregato), il debito invece è intorno il 300% del PIL (McKinsey e BIS report recenti....).

I tassi di interesse allo 0% sono spiegati ovviamente dal debito al 300%, salito da meno del 200% circa in quindici anni e dal QE, ovvero se i tassi salgono da zero la piramide del debito crolla. Ci sono 100mila mld solo di bonds ora in giro, nel 2000 erano 40 mila eh.... Cosa sono risparmi che sono stati investiti  secondo voi questi 100mila mld in bonds che girano per il mondo oggi ?

E' incredibile che Bernanke scriva e scriva riuscendo a non menzionare mai il livello di debito, anche ora che non è più boss alla FED ma se ne sta a Citadel http://www.reuters.com/article/2015/04/16/us-hedgefunds-bernanke-idUSKBN0N71W720150416. Ehi! Citadel è un fondo hedge con leva a 9 http://www.zerohedge.com/news/2014-04-09/these-are-most-levered-hedge-funds, gente che compra Bund in leva 9 e schiaccia a zero i rendimenti e non ha bisogno di risparmiare per farlo 

Minchia, l'uomo ora per mettersi in tasca qualche decina di milioni di dollari si è trasferito al fondo hedge del mondo che usa più leva in assoluto! Yes, Citadel di Griffith il nuovo datore di lavoro di Bernanke, gente che con 24 miliardi di $ in gestione ne muove 200 di mld http://en.wikipedia.org/wiki/Citadel_LLC e il loro nuovo "advisor", Bernanke, fa finta che i "risparmi" spieghino i tassi di interesse...non la gente come Citadel

Quando era professore B Bernanke diceva che il livello di debito non contava perchè per un creditore c'è  sempre un debitore... poi quando è scoppiata la crisi globale però ha comprato 3500 mld di debito per tenere in piedi... Pimco, GE, JPM, MS, GS, Wells Fargo....Citadel e  nel fare questo ha schiacciato i tassi a zero. Ma se tieni i tassi FED allo 0% per sette anni riduci l'inflazione vero ? (Williamson, Cochrane...dixit)

Se in più fai QE e i tuoi colleghi in Japan, UK, EU, Swiss, Sweden fanno anche loro QE l'effetto si rinforza e il risultato è che hai tassi e inflazione vicini a zero ovunque nel mondo maturo. Mica difficile da capire, perlomeno nel mercato finanziario fanno meno fatica a capirlo, tanto è vero che tutti comprano as we speak Bund, Oat, Treasury e creano questo fenomeno dei tassi a zero

Il risparmio lordo o netto invece cosa razzo c'entra ?....salvo come cortina fumogena per confondere le idee e far dimenticare che BB ha stampato tonnellate di moneta per comprare debito  ?

A proposito: Greenspan a Pimco, Bernanke a Citadel, Summers a ED Shaw... come va interpretato, gente che non ha risparmiato abbastanza quando era al governo ?


Sig.Ernesto 22/4/2015 - 08:23


Scusate ma il tasso di risparmio  è un flusso, mi sbaglio ?, non ho capito il discorso tot tasso di risparmio su tot debito...  Ad ogni modo non mi sembra una cosa cosí ovvia che maggiori debiti diano un tasso d'interesse dello 0%(anzi), ok il Qe ma negli USA è finito da parecchio eh non si vedono i tassi dei Tresauries salire neanche lontanamente a livelli pre-crisi considerando che vanno verso la piena occupazione, la cosa mi sembra tutt'altro che ovvia... Ma forse entro in un campo troppo complicato per le mie conoscienze di economia...

This would lend support to the SSS not to the GSG hypothesis but, as we have seen in the previous post, all the evidence shows that the SSS does not hold water, at least globally.

Following the link you can find a surprise (in any sense), was it a test to check if the students verify the data sources?

(Try the original one in the text to double-check)

Paper ECB

Vincenzo Pinto 19/5/2015 - 14:01

Mentioned here, maybe it's worth a read.

Why are interest rates so low? by Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith. Federal Reserve Bank of New York.

Se ho ben capito hanno stimato il tasso di interesse "naturale" di Wicksell usando un modello DSGE.

Per chi ancora interessa la questione dei tassi bassi, Charles Bean e Randall Kroszner (ex BoE e Fed rispettivamente) +2 altri hanno publicato un rapporto di 122 pagine sulla questione. Riassumendo, e' secondo loro per ragioni demografiche che il risparmio e' aumentato negli ultimi anni. Dovunque, ma sopratutto in Cina. Col passare degli anni la struttura demografica cambiera e i tassi ritorneranno in su.



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