SUMMARY
  • Will Bond Markets Need Saving?
  • Brazil Still Hasn’t Come Clean
  • Why The Fed Will Keep Tightening
I was raised by parents who lived through the Great Depression. They preached the ethic of thrift to my brother and me with fervor. We both began working before we were teenagers, and every nickel that we earned went into a savings account. Once a month, we’d parade into the bank to get our passbooks updated with the latest interest we had earned and parade out with a sense of pride.


Times have certainly changed since then. The fraction of young people who work while going to school has fallen sharply in the last generation, and nickels aren’t worth as much as they used to be. Passbooks have become a thing of the past, and few bank clients visit tellers anymore.

Perhaps the most significant change from the “good old days” is that my fellow baby boomers and I will soon begin spending the savings we have accumulated during our lifetimes. As this process accelerates across time and across geography, it will have a profound impact on global consumption and investment patterns. And it could create problems for countries that are indebted.

Long-term interest rates in developed markets have been on a 35-year secular decline, despite the fact that governments in developed markets have gone much more deeply into debt during that interval.



Many theories have been advanced to explain the fall in yields. Around the world, the commitment of central banks to controlling price levels have certainly strengthened, culminating in the adoption of formal inflation targets. Inflation expectations have been tamed, and the term premia demanded by fixed income investors has been reduced. More recently, the potential onset of secular stagnation has been added to the list of factors depressing borrowing costs.

Former U.S. Federal Reserve Chairman Ben Bernanke has taken a completely different tack. Beginning with a 2005 speech, and consistently thereafter, he has posited that growing pools of global savings have been the main root cause of falling long-term interest rates.

After the Asian financial crisis of the late 1990s, governments in developing countries saw the value of accumulating reserves to buffer against sudden capital outflows. Current account surpluses (which capture the amount of financial capital that a country is sending overseas) in emerging markets began to grow, and an important fraction of these amounts was invested in the safety of long-term bonds issued by Western governments. China has been an especially significant participant in this process.

At the same time, the wealth of private investors in developing countries began to expand. Seeking portfolio diversification and hard currencies, many of the newly rich also found value in developed-market debt. As their means and their anxiety about their domestic markets have increased, the appeal of Treasuries, gilts, and bunds has grown.

The nations receiving these inflows have been quite happy to accept them. Inbound foreign investment has limited debt servicing costs (for both governments and their citizens) and made it possible to finance rising debt levels. While there has been periodic anxiety over the potential that China might threaten to sell its U.S. Treasuries as a way of gaining leverage with the United States, it would be very difficult for China to find alternative markets that are as deep and liquid.

Unfortunately, the savings glut may be on the verge of diminishing. Official reserves in Asia and the Middle East have been dwindling as countries use them to address domestic challenges. Changes to global trade patterns, which are at risk from Brexit and the international posture of the U.S., could diminish the export earnings that have helped swell emerging market coffers.