Magazine article Economic Trends

The Interest Rate Conundrum and the Saving Glut

Magazine article Economic Trends

The Interest Rate Conundrum and the Saving Glut

Article excerpt

Two of the brightest blips on U.S. policymakers' radar screens are the low level of U.S. long-term interest rates and our large, expanding current-account deficit. Global saving and investment patterns go a long way toward explaining both of them.

Real long-term interest rates in the U.S. and elsewhere around the globe seem unusually low for the current state of the business cycle. A recent International Monetary Fund study of 46 countries (including industrialized, emerging-market, and oil-producing nations) suggests that lackluster global investment helps explain real interest rates.

Expressed as a percentage of world GDP, global investment fell from 23% in 1997 to 21% in 2002. It recovered to approximately 22% in 2004, according to the latest available data. The current pace of worldwide economic recovery and recent declines in the cost of capital seem capable of supporting a higher level of global investment than we have recently seen.

Among industrialized countries, most of the investment decline was concentrated in the euro area and in Japan, where 15 years of subpar economic growth has taken a toll. On balance, investment in most other industrialized countries remained fairly flat between 2001 and 2004. In the U.S., however, fixed investment has recently been rebounding.

Investment in most East Asian countries fell precipitously after the Asian financial crisis in the mid-1990s. A notable exception is China, where investment has risen sharply. Among oil-producing nations and other emerging-market nations, investment has been unimpressive. …

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