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A Global Savings Glut?
In the early years of the twenty-first century, created a “global savings glut” that had pushed countries like the United States, began experi-
the United States entered into a massive current down interest rates worldwide and thereby led encing large capital outflows. For the most part,
account deficit, which meant that it became to an excess of investment spending over sav- the capital flowed to the United States, perhaps
the recipient of huge capital inflows from ings in the United States. because “the depth and sophistication of the
the rest of the world, especially China, other What caused this global savings glut? Ac- country’s financial markets” made it an attrac-
Asian countries, and the Middle East. Why did cording to Bernanke, the main cause was the tive destination.
that happen? series of financial crises that began in Thailand When Bernanke gave his speech, it was
In an influential speech early in 2005, Ben in 1997, ricocheted across much of Asia, and viewed as reassuring: basically, he argued that
Bernanke—who was at that time a governor of then hit Russia in 1998, Brazil in 1999, and the United States was responding in a sensible
the Federal Reserve and who would soon be- Argentina in 2002. The ensuing fear and eco- way to the availability of cheap money in world
come the Fed’s chair—offered a hypothesis: the nomic devastation led to a fall in investment financial markets. Later, however, it would be-
United States wasn’t responsible. The “principal spending and a rise in savings in many rela- come clear that the cheap money from abroad
causes of the U.S. current account deficit,” he tively poor countries. As a result, a number of helped fuel a housing bubble, which caused
declared, lie “outside the country’s borders.” these countries, which had previously been the widespread financial and economic damage
Specifically, he argued that special factors had recipients of capital inflows from developed when it burst.

Two-way Capital Flows
The loanable funds model helps us understand the direction of net capital flows—the
excess of inflows into a country over outflows, or vice versa. As we saw in Table 41.2,
however, gross flows take place in both directions: for example, the United States both
sells assets to foreigners and buys assets from foreigners. Why does capital move in
both directions?
The answer to this question is that in the real world, as opposed to the simple
model we’ve just constructed, there are other motives for international capital flows
besides seeking a higher rate of interest. Individual investors often seek to diversify
against risk by buying stocks in a number of countries. Stocks in Europe may
do well when stocks in the United States do badly, or vice versa, so investors in
Europe try to reduce their risk by buying some U.S. stocks, even as investors
in the United States try to reduce their risk by buying some European
stocks. The result is capital flows in both directions. Meanwhile,
corporations often engage in international investment as part of
their business strategy—for example, auto companies may find that
Andrew Holbrooke/Time Life Pictures/Getty Images two -way capital flows, as, say, European carmakers build plants in
they can compete better in a national market if they assemble some
of their cars locally. Such business investments can also lead to

the United States even as U.S. computer companies open facilities
in Europe.
Finally, some countries, including the United States, are international
banking centers: people from all over the world put money in U.S. finan-

The result of these two - way flows is that modern economies are typi-
cally both debtors (countries that owe money to the rest of the world)
Nike, like many other companies, has cial institutions, which then invest many of those funds overseas.
opened plants in China to take advan- and creditors (countries to which the rest of the world owes money). Due to years of
tage of low labor costs and to gain better both capital inflows and outflows, at the end of 2008, the United States had accumu-
access to the large Chinese market.
Here, two Chinese employees assemble lated foreign assets worth $19.9 trillion and foreigners had accumulated assets in the
running shoes in a Nike factory in China. United States worth $23.3 trillion.

418 section 8 The Open Economy: Inter national Trade and Finance