Global saving glut

A global saving glut (also global savings glut, GSG, cash hoarding, dead cash, dead money, glut of excess intended saving, or shortfall of investment intentions) is a situation in which desired saving exceeds desired investment. By 2005 Ben Bernanke, chairman of the Federal Reserve, the central bank of the United States, expressed concern about the 'significant increase in the global supply of saving' and its implications for monetary policies, particularly in the United States. Although Bernanke's analyses focused on events in 2003 to 2007 that led to the 2007–2009 financial crisis, regarding GSG countries and the United States, excessive saving by the non-financial corporate sector (NFCS) is an ongoing phenomenon, affecting many countries. Bernanke's 'celebrated (if sometimes disputed)' global saving glut (GSG) hypothesis argued that increased capital inflows to the United States from GSG countries were an important reason that U.S. longer-term interest rates from 2003 to 2007 were lower than expected.The integration of emerging markets into the global financial system has been characterized by cyclical periods of capital inflows, interrupted by sudden capital outflows and financial crises. Probably the most renowned boom-and-bust cycle was the surge of private capital flows to emerging markets during the 90's that ended with a succession of crises, starting with Mexico in 1995 and then touching East Asian countries in 1997–1998, Russia in 1998, Brazil in 1999, Argentina and Turkey in 2001. The following boom to emerging markets during the 2000's was again interrupted by a sudden reversal of capital flows during the global financial crisis following the Lehmann Brothers collapse in 2008. Since 2009 capital flows to emerging markets are again at historical heights. This highly cyclical nature of capital flows and the increased frequency of financial crashes have cast questions about the process of financial globalisation—i.e. the dramatic expansion of international financial transactions over the past twenty-thirty years—and holdings itself. A global saving glut (also global savings glut, GSG, cash hoarding, dead cash, dead money, glut of excess intended saving, or shortfall of investment intentions) is a situation in which desired saving exceeds desired investment. By 2005 Ben Bernanke, chairman of the Federal Reserve, the central bank of the United States, expressed concern about the 'significant increase in the global supply of saving' and its implications for monetary policies, particularly in the United States. Although Bernanke's analyses focused on events in 2003 to 2007 that led to the 2007–2009 financial crisis, regarding GSG countries and the United States, excessive saving by the non-financial corporate sector (NFCS) is an ongoing phenomenon, affecting many countries. Bernanke's 'celebrated (if sometimes disputed)' global saving glut (GSG) hypothesis argued that increased capital inflows to the United States from GSG countries were an important reason that U.S. longer-term interest rates from 2003 to 2007 were lower than expected. Alan Greenspan testifying at the Financial Crisis Inquiry Commission in 2010 explained, 'Whether it was a glut of excess intended saving, or a shortfall of investment intentions, the result was the same: a fall in global real long-term interest rates and their associated capitalization rates. Asset prices, particularly house prices, in nearly two dozen countries accordingly moved dramatically higher. U.S. house price gains were high by historical standards but no more than average compared to other countries.' A 2007 Organisation for Economic Co-operation and Development (OECD) report noted that the 'excess of gross saving over fixed investment (i.e. net lending) in the 'aggregate OECD corporate sector' had been unusually large since 2002. In a 2006 International Monetary Fund report, it was observed that, 'since the bursting of the equity marketbubble in the early 2000s, companies in many industrial countries have moved from their traditional position of borrowing funds to finance their capital expenditures to running financial surpluses that they are now lending to other sectors of the economy'. David Wessell in a Wall Street Journal article observed that, 'ompanies, which normally borrow other folks’ savings in order to invest, have turned thrifty. Even companies enjoying strong profits and cash flow are building cash hoards, reducing debt and buying back their own shares—instead of making investment bets.' Although the hypothesis of excess cash holdings or cash hoarding has been used by the OECD, the International Monetary Fund and the media (Wall Street Journal, Forbes, Canadian Broadcasting Corporation), the concept itself has been disputed and criticized as conceptually flawed in articles and reports published by the Hoover Institute, the Max-Planck Institute and the CATO Institute among others. Ben Bernanke used the phrase 'global savings glut' in 2005 linking it to the U.S. current account deficit. In their July 2012 report Standard & Poor's described the 'fragile equilibrium that currently exists in the global corporate credit landscape'. U.S. NFCS firms continued to hoard a 'record amount of cash' with large profitable investment-grade companies and technology and health care industries (with significant amounts of cash overseas), holding most of the wealth. By January 2013, NFCS firms in Europe had over 1 trillion euros of cash on their balance sheets, a record high in nominal terms. When the equity market bubble burst, in the early 2000s, companies in many industrial countries cut down on borrowing funds to finance their capital expenditures. They began running financial surpluses that they lent to other sectors of the economy. In 2003–2004 the non-financial corporate sector in member nations of the Group of Seven (G-7) held $US 1.3 trillion of corporate excess saving. By 2011 Statistics Canada reported that Canadian business were 'sitting on more than $583 billion in Canadian currency and deposits, and more than $276 billion in foreign currency'. During and after the Great Recession of the late 2000s levels of economic and policy uncertainty rose dramatically contributing to the depth of the recession and the weakness of the following recovery with many corporations globally and avoiding investments and increasing their cash holdings, in what has been called 'liquidity hoarding', 'cash hoarding' or 'dead cash'.