Global reserves have come down sharply as many central banks have had to defend their currencies against the strong dollar.

The idea of a “savings glut” that gave rise to hefty overseas capital flows into the US and contributed to falling bond yields was famously promoted by former Fed Governor Bernanke in 2005. The view was not universally accepted. But if we park the disagreements to one side, there does seem to be a chance that this glut has been turning towards more of a deficit and this could lead to the persistence of high US – and global – interest rates and a weaker dollar in time.

In his 2005 speech, Mr. Bernanke, FED Chairman, pushed back against the idea that the large US current account deficit was a function of low savings rates in the US. He said it was more a symptom of high savings levels abroad. Some of this was from official sources, such as surging FX reserves and some from the private sector as current accounts improved. He noted, in particular that the flow of global savings was not going towards emerging markets as might be expected, but from emerging markets to developed countries, notably the US. He went on to argue that these inflows to the US pushed treasury yields down and almost forced the Fed to follow suit with low rates (and, we might add with quantitative easing once the zero lower bound had been reached).

As we said earlier, this is a very controversial issue. Many would see the persistence of very low rates up until the past year, or so, as a function of low inflation and nothing to do with savings trends. But let us, for the moment assume that Bernanke was correct. If we were re-writing his 2005 speech today, what would we say?

For a start, it is noted that the foreign official savings inflows, via reserve accumulation, have gone into reverse. Global reserves have come down sharply as many central banks have had to defend their currencies against the strong dollar. There is also an argument that the West’s sanctions on Russian reserves might have caused some wariness among other central banks who are reticent to hold as many dollar reserves in case they are hit by similar actions.

On the private side, we’ve seen current account surpluses in many overseas nations shrink rapidly. Of course, in the past year, or so, this has been partly down to the surge in import costs resulting from the war in Ukraine and the rise in energy bills. However, when Bernanke spoke about the savings glut, China’s current account surplus was on its way to 10% of GDP (in 2007) but today is around 2%

Mr. Steve Barrow, Head of Statard Bank G10 Strategy, said another point to bear in mind is that debt levels in many countries have increased materially and with capital flows to emerging markets weakening there’s more pressure on many countries to finance their debt domestically, not least because international financing costs are surging due to the sharp rise in US yields. The more pressure there is on countries to use their savings to fund domestic debt the less that might be available to fund other countries.

In other words, this strange observation that Bernanke noted of international lending running uphill from emerging markets to developed markets could become quite antiquated. When it comes to Europe, the amount of negative yielding debt has fallen dramatically and that might keep savers at home rather than reach for yield abroad.

What are some of the implications of this story? Mr. Steve Barrow said the long haul are likely to be above the levels that many might anticipate from domestic economic and monetary factors alone. Could higher US yields drag the Fed into lifting policy rates by more than domestic factors suggest, just as the saving’s glut did the opposite? This one Mr. Steve Barrow doubts. However, if this story is correct, Mr. Steve Barrow thinks it implies a weaker dollar in the long haul than the market might be anticipating right now.