1 / 16

Emerging Trends in Global Savings and Its Allocation: New Challenges for Financial Markets

Emerging Trends in Global Savings and Its Allocation: New Challenges for Financial Markets. Joseph E. Stiglitz Analysis Economic/Financial Conference Milan June 18th, 2002. Major Challenges. The demographic challenge in the advanced industrial countries

samson
Download Presentation

Emerging Trends in Global Savings and Its Allocation: New Challenges for Financial Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Emerging Trends in Global Savings and Its Allocation: New Challenges for Financial Markets Joseph E. Stiglitz Analysis Economic/Financial Conference Milan June 18th, 2002

  2. Major Challenges • The demographic challenge in the advanced industrial countries • The challenge of providing funds for the emerging markets • The challenge of funding the U.S. Trade Deficit

  3. Curious world • U.S., richest country in the world, largest borrower—to finance consumption • Limited flow of funds to less developed countries—and often the flow goes the wrong way • U.S., facing challenge of baby-boom retirement, should be saving heavily; yet savings rates close to zero

  4. Problems related to instability of global financial system • Crises in developing countries have become more frequent and deeper • Argentina last of a long line • Scaring off investors • But also likely to begin to scare off borrowers • As they recognize risk of borrowing • Typical pattern of lending requires exchange rate risk and interest rate risk to be borne by developing country (in contrast to what would be the case with well functioning markets) • Even limited indebtedness can be unaffordable • And with devaluation, debt/GDP ratio can increase overnight • Borrowing also leads to Dutch disease problems • And thus can adversely impact employment • Downside risks from crises more than offset benefits

  5. Instability related to global reserve system • Sum of surpluses equal sum of deficits • If China and Japan insist on having surpluses, rest of world must be in deficit • A decrease in deficit by one country leads to an increase by someone else • A form of Global Hot Potato

  6. Situation where U.S. is “deficit of last resort” also related to global reserve system • Demand for dollars for reserves • In equilibrium, U.S. must export “dollars” • Implies that U.S. must have deficit

  7. Low savings rate also related to global reserve system • U.S. should be saving for retirement of baby boomers • In all countries retirement of baby-boomers may put strain on asset markets • As baby boomers try to simultaneously cash out at same time • Good news: dis-saving not as strong as life cycle theory predicts • Real problem: U.S. must have a trade deficit • Implies U.S. must be borrowing abroad • Implies savings less than investment • In 90s high level of investment • In 80s low level of savings • Post tech bubble—returning to earlier situation • Surprising, given traditional explanation of low savings: • Large increases in stock market values

  8. Issues can be looked at from macro and micro perspective From micro-perspective • How to allocate huge flows of funds into pension funds in coming years • Avoiding mistakes of “bubbles” • Including herd behavior • Problems exacerbated by conflict of interest issues in U.S. banking/investment/auditing • Importance of good regulatory framework

  9. But deficit represents a threat to long term global stability • As U.S. has already moved from being largest creditor to largest debtor country • Foreign holdings of US securities had raised from 49% of all portfolio liabilities in 1989 to 65% in 2000 • Account for 42.8% of holdings of U.S. treasury securities • Own 11.2% of US equities • 21.4% of corporate bonds • And lack of confidence could lead to a shift away from U.S. securities • Leading to a weakening US dollar • Reinforcing shift away • Exacerbated by large amounts of short term funds

  10. Instability helps account for some of peculiar patterns • China has large trade surplus • Wants to avoid disaster caused by trade deficits • Likely to be exacerbated by China’s entry into WTO • Strong comparative advantage in industrial goods • Low wages • Strong technology • Access to markets • Likely to contribute to problems in both developing and developed countries • Risk: new era of protectionism • Signs already apparent in U.S.

  11. System also leads to a systemic global aggregate demand problem, which is likely to get worse as country deficits are tames and monetary policies restrained • Huge additions to reserves every year • Additions to reserves are a subtraction from global aggregate demand • In this view, U.S. had to get rid of its huge fiscal surplus • True numbers far worse than official numbers • “Enron” level accounting problems • Though it poses problems for U.S. long term growth • Contributing to risk of global instability

  12. System is also inequitable • Cost of reserves is enormous for developing countries • U.S. reaps benefit

  13. SDRs / Global Greenbacks (I) • Regular issue of SDRs or Global Greenbacks could be used to finance global public goods, including development, break the instability nexus, promote equity and development • Would not be inflationary • Represents a mutual help arrangement (CLUB or COOP) • With reserves representing amount of goods a country could acquire from others in time of crisis.

  14. SDRs / Global Greenbacks (II) • Could be done in way to induce all to participate • Members of “CLUB” would only hold reserves in other members

  15. Summary (I) • From Mexico to Thailand • From Thailand to Indonesia and Korea • From Korea to Russia • From Russia to Brazil • From Brazil to Argentina…and Turkey? • Who is next?

  16. Summary (II) • Great deal of talk about reform of global financial architecture • Little action • Argentina: Recognition that Big bailouts don’t work • Looking for alternatives: bankruptcy/workouts/standstills • But U.S. looks askance at any judicial approach • Just reform of contracts • But contractual approach has not worked within countries • Won’t work for debts that move cross borders • Failure to recognize systemic nature of problem • Requires systemic reform

More Related