The Savings Glut Hypothesis

One of Ben Bernanke's most controversial theories is his Asian Savings Glut Hypothesis. The Asian Savings Glut Hypothesis shows how high savings rates in China effects the supply, demand and prices of US goods and how these three factors affect US wage rates, unemployment rates, and yields on federal debt (T-Bond Yields).

Here is a brief explanation of how Bernanke sees the interactions between Asia and America. Pretend, for a second, that there are two countries, one named China and the other named the United States. These two countries compete with each other to sell as many basketballs and basketball shoes as possible. China decides that the best way to compete with the US is to keep wages (the amount of money manufacturing employees make per hour) as low as possible. This ensures China that when a consumer is at the store looking at basketballs and basketball shoes, the balls and shoes on the Chinese aisle are always cheaper than the balls and shoes in the US aisle. Therefore, assuming Chinese made balls and shoes are the same quality as US balls and shoes, the Chinese have become more competitive than the US and consumers will buy more Chinese goods than US goods.

That is a simple, obvious concept. The complexities of the Asian Savings Glut Hypothesis occur when we ask how can China constantly keep wages low while at the same time keeping the ball and shoe consumers rich enough to afford the balls and shoes?

The concept that expains this is called the Balance of Payments and will be explained further in the next blog. The balance of payments concepts simply says that money MUST go somewhere. If a consumer pays $10 for a basketball and a ball, and they cost $3 to make, the extra $7 must go somewhere. In America, the $7 would go to wage-earning employees, shareholders, banks, credit cards, etc. In China, since they are trying to keep wages as low as possible, the government creates policies to make sure the extra $7 goes anywhere but to the wage earning employees, credit cards, banks, etc. In fact, the banks are so controlled by the government that loans are dictated to go to only two places: low interest rate loans to large manufacturing companies; or to the purchase of US T-Bonds. When China buys a T-Bond, many effects occur. These will be discussed in the next blog.