In China, the constancy in high household saving rates masks two striking, but broadly offsetting, factors: a 10 percentage point fall in household’s income share; and a 10 percentage point rise in household’s saving propensity (Ma and Yi (2010)). Much of the rise in saving propensities appears to be precautionary. Facing “three mountains” in the future – education, pensions and health care – Chinese consumers have taken the high (saving) road. In the US, the fall in the household financial balance correlates strongly with the path of household net worth (McKelvey (2010), Chart 13). This correlation emerged strongly during the 1980s, with the simultaneous rise in net wealth and fall in saving. This correlation has remained strong as net worth has reversed recently due to falling house and equity prices. What lies behind these movements? Lax monetary policy has been suggested by some (Taylor (2007)). Financial liberalisation is a second plausible candidate. This had the effect of loosening constraints on the supply of housing credit and thereby boosting housing demand and prices in the US. It also enabled households to mobilise and withdraw the accrued equity in their property to finance spending. Estimates of housing equity withdrawal for spending rose from under 2% of personal disposable income in 2000 to around 4% at the peak in 2005 (Greenspan and Kennedy (2007), Chart 14). Micro-level data support this story.
But capital flows may also demonstrate an imbalance between demand and output in an economy, which must eventually correct if debt and wealth stocks are not to become unsustainable. Sharp corrections in rates of domestic absorption and/or capital flows could then result, with attendant output costs. In that sense, global imbalances may also be bad cholesterol. 1 So which are capital flows today? Historical evidence is illuminating. Chart 1 plots (the absolute value of) current account balances in thirteen countries, as a % of GDP, since 1880. Other than in wartime, global imbalances are at their highest in well over a century. They have surpassed levels which prevailed during the classical Gold Standard and are more than twice levels during the Bretton Woods period (Chart 2). For some individual countries, these capital flows look larger still, both absolutely and relative to historical norms (Chart 3). It is not just the size of these global flows that is unusual. So too is their direction. Contrary to theory, capital is flowing from developing countries with a low capital stock, towards developed countries with a high capital stock (Lucas (1990)). In other words, capital is flowing “uphill”, away from countries where the marginal product of capital should be high and towards countries where it should be low. This makes the pattern of global capital flows doubly perplexing. 1  Blanchard and Milesi-Ferretti (2009) discuss the causes of “good” and “bad” imbalances. BIS Review 174/2010  1  Perplexing need not mean bad.