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The Myth of the Global Savings Glut

There never was a savings glut. A glut of liquidity, yes. But that is a different story. Excess liquidity is not the same as excess savings, and should not necessarily be "spent."

The global "savings" that arose came from America's trade (and budget) deficits. An easy monetary policy flooded the world with dollars, without any apparent depreciation. That's because these dollars were snapped up and "saved"--by foreigners.

Americans could spend as much as they did precisely because others were saving as much as they did. There is a limited suppy of goods and services in the world. If Americans were spending more than they were producing, it's only because others were spending less, and financing the difference.

It was a global Faustian bargain; Americans would overconsume, so that developing countries that didn't know how to consume could overproduce. In this way, everyone could be made happy for a short while, in a virtuous circle. But as my book, "A Modern Approach to Graham and Dodd Investing warned, "It was one in which the links were too complicated, and a broken link would lead to an avalanche." That broken link has now occurred, and the avalanche is just beginning.