It takes two to tango: Asian savings glut or US savings dearth?

Here's something relevant to Asian economies like Thailand that you might have missed. 

Thailand and other economies in Asia such as China, Malaysia, and South Korea share many things in common:

1. Heavy reliance on exports to drive economic growth.
2. Large current account surpluses.
3. Large accumulations of US dollar foreign exchange reserves.
4. Great downside risk exposure in case of a US economic slowdown.

In the massive US Economic Report of the President released recently there is a play-by-play description of the US financial crisis that reached boiling point this September:

* The roots of the current global financial crisis began in the late 1990s. A rapid increase in saving by developing countries (sometimes called the "global saving glut") resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged investors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.

* The influx of inexpensive capital helped finance a housing boom. House prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply.

* Considerable innovations in housing finance "the growth of subprime mortgages and the expansion of the market for assets backed by mortgages" helped fuel the housing boom. Those innovations were often beneficial, helping to make home ownership more affordable and accessible, but excesses set the stage for later losses.

* The declining value of mortgage-related assets has had a disproportionate effect on the financial sector because a large fraction of mortgage-related assets are held by banks, investment banks, and other highly levered financial institutions. The combination of leverage (the use of borrowed funds) and, in particular, a reliance on short-term funding made these institutions (both in the United States and abroad) vulnerable to large mortgage losses.

* Vulnerable institutions failed, and others nearly failed. The remaining institutions pulled back from extending credit to each other, and interbank lending rates increased to unprecedented levels. The effects of the crisis were most visible in the financial sector, but the impact and consequences of the crisis are being felt by households, businesses, and governments throughout the world. (Source: Economic Report of the President (ERP) via Econbrowser)

Another description of what happened:

"The process by which U.S. output was sustained through the long-period of growing imbalances could not have occurred if China and other Asian countries had not run huge current account surpluses , with an accompanying “savings glut” and a growing accumulation of foreign exchange reserves …. flooding the US market with dollars and thereby helping to finance the lending boom." (Source: Brad Setser)

To summarize:

1. China's currency remained undervalued.
2. Chinese exports remained cheap and competitive in international markets.
3. China ran huge current account surpluses from massive exports.
4. China accumulated massive US dollar foreign exchange reserves.
5. China collectively saved money through these reserves.  
6. China invested these savings back in the US.
7. Some of this investment was via Sovereign Wealth Funds.

Searching for someone to blame when bad things happen is probably a natural thing for humans to do but as Brad Setser observes both "debtor and the creditor tend to share responsibility for most financial crises."

Or as Menzie Chin puts it: "excess saving from East Asia and oil exporters enabled...the US housing boom, and the search for yield" but was not the only cause.

In other words: It takes two to tango:

"Some economists have gone so far as to suggest that the growing imbalance problem was entirely the the consequence of the savings glut in Asian and other surplus countries. In our view, there was an interdependent process in which all parties played an active role. The United States could not have maintained growth unless it had been happy to sponsor, or at least permit, private sector (particularly personal sector) borrowing on such an unprecedented scale.”

"Savings glut" might not be the right term:

"Monetary printing in China to swap Renmimbi for US dollars (so that China could keep its currency artificially low) does not constitute a "savings glut". Nor does enormous carry trades in Japan." (Source: Mish)

It is not that people in Asia were saving too much, people in the US were saving too little (savings dearth).

The US savings rate "fell precipitously" over the period 1996-2004 because interest rates were held low for too long causing a disincentive to save:

...there is every reason for the U.S. savings rate to have fallen: The Fed continuously held interest rates too low thereby creating a negative incentive for anyone to save. Eventually a near unanimous belief set in that asset prices were a one way street headed North and the purchasing power of the dollar a one way street headed South. So why save?

And after the Greenspan Fed foolishly cut rates to 1% in the wake of the dotcom bust, there was a mad dash out of cash, culminating with panic buying of houses. That panic in turn was followed by cash out refis to support consumption as people bit off more house than they could really afford. This is the origin of the much talked about negative savings rate. (Source: Mish)