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Growing international mobility of savings

When Robinson Crusoe was shipwrecked on an unknown and apparently deserted island, only his courage and boldness would reveal his ability to survive in such a hostile environment. Constantly fishing and gathering, he soon found out how little free time he had and how scarce was the technology at his disposal. But, once his basic needs were met, he was able to perfect his techniques, make better tools and put his shelter in order. That is, in economic terms, at the moment his production capacity was higher than his consumption needs, he could devote his excess time to activities that allowed him to substantially improve his future production capacity. ?«Saving?» time and putting it into investment are key factors in the development and economic progress of any society.

The adventures of the man on the desert isle are useful to illustrate elementary economic concepts and for this reason they are often used in teaching economics. When a much greater population complicates the model, the complexity of economic phenomena increases but the essence remains. Savings/investment analysis is precisely a matter that has taken up most effort in the history of economic thinking. What is beyond doubt is its importance in the real world when it comes to explaining economic dynamics, both in simple economies and in the existing diversity in the world today.

In the era of globalization, one of the most notable developments has been the relocation of processes of savings and investment. The progressive removal of economic borders is freeing savings from its national ties. What a Robinson Crusoe saves on one continent is used by another Robinson Crusoe on another continent. Investment is not now constrained by the capacity of personal savings or those of business or on a national scale. When it comes to channelling those savings, the efficiency of the international financial system largely explains why in recent times the international economy has grown at the highest rates in decades and that, nevertheless, long-term interest rates remain at all-time low levels. Especially at a time of increasing prices of raw materials, notably oil, which has done less harm than might be expected to those countries dependent on those products, thanks to the fact that the exporting countries have moved their savings toward international financial markets thus facilitating the adjustment of world economies.

This ability to adjust savings and investment at a global level undoubtedly constitutes the optimization of the international economic pattern. Those countries or regions that are more dynamic, with greater growth potential, are able to absorb the savings of more mature economies or regions with less ability to generate attractive financial assets in a balance that is more fruitful than that of economies closed off by national restrictions. The paradox lies in that now the main world source of savings is the Chinese economy whose growth potential is very high whereas the main recipient of this savings is the US economy whose growth depends precisely on the excess spending which shows up in the huge deficit in the current account balance, as it has done for a number of years. This is a paradox that may largely be explained by the strength of US financial markets, their capacity for innovation and the development of new instruments. But it also raises the unknown factor of how long it is possible to keep stretching the rope of financial leverage.

This ability to adjust savings and investment at a global level undoubtedly constitutes the optimization of the international economic pattern. Those countries or regions that are more dynamic, with greater growth potential, are able to absorb the savings of more mature economies or regions with less ability to generate attractive financial assets in a balance that is more fruitful than that of economies closed off by national restrictions. The paradox lies in that now the main world source of savings is the Chinese economy whose growth potential is very high whereas the main recipient of this savings is the US economy whose growth depends precisely on the excess spending which shows up in the huge deficit in the current account balance, as it has done for a number of years. This is a paradox that may largely be explained by the strength of US financial markets, their capacity for innovation and the development of new instruments. But it also raises the unknown factor of how long it is possible to keep stretching the rope of financial leverage.