August 29, 2014
’Saving Glut’ Redux?
By Brady Willett
It may be a little early, but there is the potential that another round of ‘global saving glut’ nonsense is about to emerge to help deflect blame from the Fed when the current asset boom goes bust. You may recall that during the previous unsustainable run-up in asset prices a consensus started to form that the Federal Reserve was too loose for too long, and to help defray this criticism the Fed contended it had desperately tried to raise interest rates but the global saving glut was in control:
“…over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which 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.” Bernanke. March 10, 2005
The above coining of the phrase notwithstanding, it is an entirely revisionist idea that the Fed was raising rates to combat the maniacal boom in asset prices. To be sure, while the Fed started raising interest rates in mid-2004, it was doing so as a matter of interest rate normalization following a prolonged period of easing. Moreover, it must be pointed out that at no time during the Fed’s SSLLLLOOOWWW interest raising cycle did members direct their tightening policies at asset prices.
* Quite frankly, it has always been a slick fabrication when the Fed, after the 2007 bust, contends that since it was raising short term interest rates leading into the housing bust it should not be blamed for the slower moving increase in long-term interest rates (which were being suppressed by the ‘savings glut’). The reality, of course, is that the Fed didn’t see the debt crisis coming, the Fed underestimated the severity of the crisis when it arrived, and monetary policy never aimed its weaponry at any ‘savings glut’ enemy.
Flashforwrd to today:
“Remember how cute it was in the beginning of the year, when we kind of thought that the tapering of QE would potentially have the Fed lose control of long-term rates? The opposite has happened. As a matter of fact, now the tapering of QE is a secondary influencer on the long end. Right now, it's all about Europe. The money just keeps getting flooded into the system, and it has to find yield.” CNBC
Should the above logic be extended for any period of time, does the Fed get a pass for helping incite one of the strongest booms (and coming bust) in asset prices ever? Should the next financial bust arrive say in mid-late 2015 – or after QE operations are completed and as the Fed is tightening – does the pro-Fed mindset blame another ‘saving glut’ for igniting the final maniacal run-up in asset prices? Stranger things have happened…