The problem is that, wherever we look, we see people who want or need to lend or at least to reduce their borrowing:
■ In the euro zone and UK, governments are trying to reduce deficits whilst the credit squeeze is, in effect, forcing the private sector to save.
■ US companies, like their UK counterparts, are generating more profits than they've been able or willing to invest. Figures from the US Federal Reserve show that non-financial companies were net lenders of $379bn in the last 12 months.
■ Asian economies are generating big net savings, in part because the lack of adequate welfare states forces people to make their own provision against old age or unemployment. The IMF forecasts that developing Asian economies will run a current account surplus - that is, an excess of domestic saving over investment - of $145.9bn this year.
■ High prices mean commodity producers are getting more revenues than they can spend. The IMF expects middle eastern and north African economies to have current account surpluses of $439.7bn this year, with former Soviet Union economies having surpluses of $106.2bn.
This poses the question; if so many people want to lend, who's going to borrow?
Herein lies the danger. If the answer is "not enough people" then we'll be hit by the paradox of thrift. If everyone reins in their spending in an attempt to save, incomes fall and so some people will not have the wherewithal to save. Their plans to save will thus be thwarted and they'll be forced to borrow. We'll have recession instead of high savings. This is why fiscal austerity can be self-defeating. But the paradox of thrift doesn't just apply to individual national economies. It applies to the world economy too.
The global economy therefore needs a big borrower. Luckily, it has had one in recent years - the US government. Its borrowing supplied Asian economies and commodity producers with the safe assets - US Treasuries - they wanted, whilst helping to sustain global aggregate demand.
In theory, this could and should continue. The US's exorbitant privilege means it can borrow at negative real interest rates even for terms as long as 20 years. It therefore makes sense for it to be the world’s borrower of last resort.
Sense, however, does not always carry much weight in policy-making. US government borrowing could fall sharply next year as temporary tax cuts expire. The Congressional Budget Office recently warned that, unless policy changes, the US federal deficit will shrink by almost $500bn (three per cent of GDP) next year. This, it said, "will lead to economic conditions in 2013 that will probably be considered a recession." And this, of course, would hurt economies outside the US.
Most observers hope that Congress will patch up some deal to stop the economy falling off this "fiscal cliff." But such an agreement could entail plans to reduce borrowing over the longer-term. As long as the rest of the world wants to save, this threatens to replace a sudden paradox of thrift with a longer, slower one.
Here, however, we have a hope - Mitt Romney's tax plan. He hopes to shrink the deficit and cut tax rates by eliminating tax loopholes, in the belief that lower tax rates will promote economic growth. Many economists, though, think this is too optimistic and that it might raise the deficit instead.
But from the point of view of a global economy in which so many people want to save, this is to be welcomed.
Of course, the US will have to reduce its government borrowing eventually. But it would be better for the global economy if it waited until the rest of the world was less desperate to save. In this sense, Romney’s tax plan is the right idea for the wrong reason. Which is the best we can hope for.
