According to a Pimco report – No End to the Savings Glut – the “secular global savings glut” is responsible for low long-term interest rates.
Pimco report author and managing director Joachim Fels said the “savings glut” depressed the natural real rate of interest, which is the function that brings investors’ and savers’ desire into an equilibrium.
“The unfortunate truth is that it is virtually impossible to quantify the drivers of the global real long-term equilibrium interest rate or even come up with approximate estimates,” Mr Fels said.
“Looking ahead, my hypothesis is that the global savings glut is more likely to increase than decrease in the coming years.”
Mr Fels said there are two reasons for this: “negative time” in advanced economies and “macro adjustment” in emerging economies.
“First, the demographics in the advanced economies are likely to remain a driver of higher desired saving for some time as people will want to build wealth to prepare for a longer prospective retirement.”
Mr Fels said that in some societies, the rate of time preference has become negative. Simply, people value future consumption more highly than today’s consumption.
“One intriguing consequence of negative time preference is that it provides a theoretical explanation for negative interest rates,” he said.
According to Mr Fels, emerging countries are more likely to become larger contributors to the global savings glut in the future.
Mr Fels noted that emerging markets are experiencing slower growth, or even recessions. This trend depresses import growth and therefore contributes to a larger account surplus.
“Moreover, virtually the entire emerging market complex has seen significant currency depreciation this year,” Mr Fels said.
“This will improve EM [emerging market] cost competitiveness against the advanced economies and should lead to larger currency account surpluses or smaller current account deficits in EMs [emerging markets] over time.”
Mr Fels indicated that this means that the global savings glut is here to stay.
“If anything, it is likely to increase in the foreseeable future.”
