The global savings glut idea attempts to point out that the current account deficit of the United States is not simply or entirely a product of U.S. economic policies. It is a global phenomenon created by global forces. Over the last 10 years or so the amount of savings being done around the world has exceeded desired investment in those same countries for various reasons, including the aging of some industrial economies, the oil revenues of crude producers, and most importantly, the fact that emerging market economies over the last 10 years have gone from being significant borrowers in international capital markets to large lenders, to having large current account surpluses. As a result, there's been enormous amounts of capital dumped into international capital markets, which helps to account for the fact that global interest rates are at record lows or at least at very low levels. The inflows of that capital into the United States, which is an attractive destination for this capital, and the resulting impact on asset price in the United States is, in my view, part of the reason why Americans have increased their consumption and reduced their savings, which has resulted in this current account deficit. Now...I don't view the current account deficit as desirable. I think there's a number of reasons to try and end it. But in order to end it or at least to wind it down over a period of time, it's going to require action both within the United States and also within our trading partners. On the part of the United States, we need to increase our own savings relative to investment. With respect to our trading partners, there needs to be, first, increased reliance on flexible exchange rates, as we've already discussed, and also more willingness on the part of our trading partners to rely on domestic spending, domestic government purchases or consumption, to drive their economies, as opposed purely to an export-led strategy.

The trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment...What is unclear is whether the excess is due to a glut of saving or a shortfall of investment.

This [global savings glut] factor does not solve the term structure puzzle, for two important reasons. First, as noted, the glut has been in force throughout this decade, while the term-structure puzzle refers to the period since early 2004. Second, the glut is a source of downward pressure on real interest rates at all maturities since 2001, while the term structure puzzle instead refers to the recent flat trend of the long rate despite a significant increase in the short rate.

I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today...The global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders.