Solving The Problem Of The Global Savings Glut

Another NY Times article today discusses the global savings glut in Asia and Europe and whether that money's search for yield is creating an asset price bubble, particularly in US corporate bonds. According to Brad Setser, an expert in global financial flows, about $750 billion of private money has come into the United States in the last two years. He estimates that two-thirds of that total is coming from primarily Asian and, to a lesser extent, European investors. This global savings glut keeps interest rates artificially low as the money cycles through the financial system in search of higher returns. Everyone acknowledges that a better use of these savings would be to actually invest these savings in "real" investments like infrastructure or even direct spending than to just be chasing yield.

The role of financial markets is supposed to be an efficient allocation of capital. It's pretty clear that is not happening these days. The answer, of course, is for government to step in and rectify the problem. The easiest way is for governments to issue more debt in order to pay for those "real" investments. But the deficit hawks and the believers in the "confidence fairy" that demands austerity refuse to accept that. Of course, as we have seen from the economic contractions and anemic growth from those countries forced into austerity, this is totally counterproductive. That is why European austerity is so frustrating. But, if you are worried about increasing the deficit but still want to put that global savings glut to good use, there is another alternative. Simply restore a more confiscatory tax structure so you can tax some of these savings and use the resulting surplus to actually grow your economy, either through investments or simply passing the cash on to poorer citizens who will actually spend the money. If the financial markets can not fulfill their role, then it is time for government to do the job for them.