The Great Rebalancing

In a globalized world, in other words, savings and investment rates are not set wholly or in some cases even primarily by domestic cultural preferences or by domestic policies. They are heavily affected by foreign policies through the trade account.

In fact we have already seen countries like Japan and Korea complain loudly when large foreign central banks shift out of dollars and into their currencies, and the European response is likely to be no different.

Very low lending and deposit rates create a powerful mechanism for using household savings to boost growth by heavily subsidizing the cost of capital.

“late 19th Century imperialism rested above all on capital exports.

When the market and other economic agents believe that a sovereign borrower has too much debt, they create a series of events that exacerbate the debt problem. The process works in a straightforward way. As the fiscal credibility of the government declines, it automatically forces nearly all the major sectors of the economy to change their behavior

For much of the past three decade we have seen the opposite, so the household share of the rapidly growing pie has contracted while the state share has expanded. This must be reversed.

but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.

governs the economy affects savings and investment imbalances. Culture and individual preferences, unfortunately, matter a lot less than we think, even if they are much easier to understand and discuss.

Of course it could also be because interest rates are too high, in which case rising income inequality would, presumably by increasing the total amount of savings, cause interest rates to drop. In that case there might indeed be an increase in total productive investment.