Global saving and investment rates have fallen and current account imbalances have widened to unprecedented levels, yet real long-term interest rates remain low in most countries. How did the global economy arrive at this position? Some have argued that the catalyst is the substantial changes that have taken place in Asia, where saving has risen but investment has collapsed since the late 1990s. According to this view, the swing in the saving-investment gap—from deficit to large surplus—in emerging Asia has resulted in an excess global supply of saving (a global saving "glut") that has been channeled to the United States to finance its large current account imbalance (Bernanke, 2005). At the same time, this would explain the low level of long-term real interest rates, which is needed to equilibrate desired saving and planned investment on a global basis. Others have argued that the sharp drop in national saving in the United States— reflecting the deterioration in the fiscal position and the increase in housing wealth—and the recent rebound in investment are at the root of current account imbalances (see, for example, Roubini and Setser, 2005). Thus, according to these observers, current global imbalances are mainly the result of policy decisions—both fiscal and monetary—in the United States. By itself, however, this would not explain the low level of real interest rates, as a higher demand for net saving from the United States would lead (everything else equal) to higher, not lower, global interest rates.
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