The global macro outlook is driven by the interaction among three gluts: the savings glut, the oil glut and the money glut.
While the global savings glut is likely the main secular force behind the global environment of low growth, low inflation and low interest rates, both the oil and the money glut should help lift demand growth, inflation and thus interest rates from their current depressed levels over the cyclical horizon.
Let’s look at each of the three gluts in turn.
The term “global savings glut” is a simplification, of course. Ben Bernanke coined the term a decade ago to describe a situation where an excess of global desired saving over global desired investment depresses low long-term interest rates.
Ten years later, it is fair to say that the ex-ante savings/investment imbalance is even greater and the global equilibrium real interest rate even lower.
Why is it, to simplify further, that everybody wants to save more but nobody wants to invest? There is a raft of reasons, but these may be the most important:
History: The financial crisis casts a long shadow on consumption, saving and investment behavior.
Demography: People want and/or have to save more for a longer retirement period as the retirement age has not risen along with life expectancy.
Inequality: It is rising, and the rich save more than the poor.
Technology: Many new industries have low capital needs, and disruptive technologies make investors in old industries reluctant to commit capital for a long time.
Necessity: Many emerging market countries have aimed to reduce their capital imports and slashed investment spending following the 2013 taper tantrum.
Due to these factors, the global economy has been suffering from a deficiency of demand, both investment and consumption demand. And, as I described above, weak demand for a long time slows potential growth as temporary turns into permanent joblessness (via “hysteresis”) and weak investment dents the growth of the capital stock.
This implies that the real equilibrium (or natural) interest rate in the world is probably negative.
And if governments fail to fill the demand gap with fiscal stimulus and central banks cannot push real rates significantly down (due to the lower bound for nominal rates and low inflation), the economy remains lethargic and central banks have to blow pretty bubbles in the financial markets in order to avoid even worse outcomes.
The oil glut, evident since the second half of last year, helps to mitigate the depressing impact of the savings glut on consumer demand by shifting income from oil producers, who have a high propensity to save, to consumers, who typically spend most of their income.
As we have seen in the U.S. over the past few quarters, the immediate negative impact on investment in the oil sector may initially outweigh the positive impact on consumer spending as consumers are slow to spend the windfall gains from lower gas prices.
Yet, for a net importer of oil like the U.S., the effect on aggregate demand from lower oil prices should remain positive over the cyclical horizon, and consumer spending in the second quarter in fact picked up nicely from the first-quarter lull. True, the very recent further decline in crude oil prices still has to translate into lower gas prices, but once it does, consumers will start to react.
Enter the third of our gluts – the money glut – which has been fueled by the impact of both the savings glut and the oil glut on central bank policies.
The savings glut has long forced central banks to try to push real interest rates lower toward and ideally below the negative real equilibrium rate – mainly through zero or even negative policy rates, forward guidance and quantitative easing.
And the oil glut, through temporarily depressing headline inflation and damping inflation expectations further, has led to a doubling-up of these efforts – witness the wave of central banks easing steps around the globe since the start of this year.
We expect more monetary easing to come, particularly in China and in many commodity-producing countries, so the global money glut, which is already increasing due to heavyweights like the European Central Bank and the Bank of Japan executing their asset purchase programs, will swell further.
To conclude, what is the combined effect of the three gluts?
First, expect global growth, inflation and interest rates to remain much lower than in previous cycles over the secular horizon, reflecting the impact of the global savings glut.
Second, look for a pickup in global economic activity and inflation over the cyclical horizon, reflecting the combined effects of the oil glut and the money glut.
And third, expect bond yields to rise moderately from current levels on the back of the cyclical recovery and in response to the Federal Reserve embarking later this year on a long but shallow hiking path toward a neutral interest rate of around 2 percent.
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