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The dark side of the savings glut

Developed economies face a lack of good investment opportunities
The dark side of the savings glut

It's widely believed that the past few years have seen a savings glut - a huge supply of savings, largely from Asia. This explains several important facts about the world economy: the surprising ease with which the US financed its current account deficit; banks' rush to supply mortgage securities to meet a high demand for high-yielding assets; and low real interest rates even in the face of massive government borrowing.

There is, however, an important aspect of the story of the savings glut that often gets overlooked: if there is an excess supply of savings, what is the excess relative to?

The answer is: a demand for capital from companies. The flip side of the excess supply of savings is a deficiency of capital investment. As Federal Reserve governor Ben Bernanke said in a famous speech which popularised the notion of a savings glut, there has been a "dearth of domestic investment opportunities" in developed economies.

One sign of this dearth is that the share of capital spending in UK GDP has been trending downwards for years. Even before the recession began, business investment accounted for just 10 per cent of GDP, its lowest proportion since records began in the 1960s; it's now 8.5 per cent.

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