Fiscal policy to boost investment, and therefore, overall demand, is one way to counter the global savings glut. So far, developed country governments have relied on monetary policy, including extraordinary measures such as QE, to stimulate growth, but this medicine has likely run its course. An increase in fiscal spending, such as a broad infrastructure program spread over several years, may boost efficiency and create beneficial knock-on effects to boost demand. China was able to prop up its growth during and following the Great Recession by pulling infrastructure investments forward, creating additional jobs and related spending, but going too far can also have its drawbacks. Furthermore, not all countries are able to exercise this option. Austerity measures in the Eurozone leave governments with very little to spend on such projects.

The last major fiscal policy initiative in the U.S., the American Recovery & Reinvestment Act (ARRA), expired five years ago in 2011. Such policies are not without controversy, because they increase budget deficits and carry potential for abuse and fraud. Still, other policies, such as incentivizing corporate R&D spending, are another way to kick-start projects that may boost investment opportunities and improve aggregate demand.

Ultimately, countries will need to find a way to increase aggregate demand and reduce the demand for savings. Central banks, as mentioned previously, are trying this by targeting low interest rates and QE programs; but so far, these efforts don’t appear to have gone far enough, and the global savings glut remains a threat to global growth.

Conclusion

The issues related to—and to some extent, the very existence of—a global savings glut, can be difficult to untangle. Though complicated, the possibility of a global savings glut is one plausible explanation of persistently low interest rates and weak global demand. It also explains the global trend toward low inflation or even deflation, despite predictions of rampant inflation following the post-crisis expansion of central bank balance sheets through QE programs. These issues, regardless of the cause, are creating challenges for longer-term investors or retirees seeking steady portfolio income, and may continue to as long as the glut remains. 

Anthony Valeri is fixed-income and investment strategist for LPL Financial.

First « 1 2 3 4 » Next