Savings Glut or Investment Deficiency?

Mark Thoma treats us to an exchange between Martin Wolf and Edmund Phelps that revives the savings glut argument. Martin writes:

The “savings glut” hypothesis is associated with Ben Bernanke, now chairman of the Federal Reserve. But the idea was floated earlier by others. Brian Reading, of Lombard Street Research, lays out the line of argument in a recent note*. A substantial excess of savings over investment has emerged, he says, predominantly in China and Japan and the oil exporters … This has led to low global real interest rates and huge capital flows towards the world’s most creditworthy and willing borrowers, above all, US households. The short-term effect is an appreciation of real exchange rates and soaring current account deficits in destination countries. To sustain output in line with potential, domestic demand in those countries must also be substantially higher than gross domestic product.

About two years ago Daniel Gross criticized any attempt to excuse America’s low national savings rate:

The savings glut may be an accurate and subtle take on the world’s economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings. No wonder Bernanke is so popular at the White House.

Brad DeLong added to Daniel’s discussion the following:

Daniel Gross writes about the “savings glut.” But world savings are not that high: the swing of the U.S. federal budget from $200 billion annual surplus to $350 billion deficit alone – that’s a decline in savings equal to 30% of China’s entire current exchange rate GDP. It’s not so much a global savings glut as a worldwide investment shortfall.

To suggest that we have a savings glut that would lead to a recession unless we continue fiscal expansion presumes some sort of liquidity trap where lower interest rates will not encourage more investment demand. That may have been a plausible explanation where short-term interest rates were less than one percent (see our chart). Over the past three years, however, we have seen a significant increase in short-term interest rates. In other words, monetary policy has been trying to restrain investment demand. So explain to me why a rise in national savings combined with an easier monetary policy would be a bad idea?