Foreign Saving Gluts and American Financial Imbalances

The idea that trade imbalances are more likely to be the result of credit imbalances than of savings imbalances ignores the role of savings imbalances in creating credit imbalances. When a surplus country demands to be paid for its trade surplus with claims on American assets, the U.S. economy must adjust to create these assets—and one of the most common ways it does so is by expanding credit.

On November 27, 2020, I sent out a rather long tweet in response to a very good article in the Economist called “Why It Is Misleading to Blame Financial Imbalances on a Saving Glut.” I later received a lot of positive responses asking me to expand my discussion further. Because Twitter was obviously not the right forum in which to expand what was already a long tweet, I decided to do so in this short blog post. Read more…..

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