In contrast to the situation in emerging markets, the aggregate current account surplus for industrial countries other than the United States declined recently, from almost $350 billion in 2004 to about $200 billion in 2006; most of the decline reflected a sharp drop in the euro-area balance. Thus, unlike in the 1996-2004 period, industrial countries other than the United States have absorbed part of the increase in the net supply of capital coming from the emerging-market economies. In aggregate, the recent decline in the current account balances of non-U.S. industrial economies reflects an increase in investment rates; saving rates have generally remained little changed.7In short, in the emerging markets, realized saving and current account surpluses have increased since 2004. In the industrial countries, over the same period, current accounts have moved further into deficit, primarily because of higher realized rates of investment.What about real interest rates? Since I discussed these issues in March 2005, real interest rates have reversed some of their previous declines. For example, in the United States, real yields on inflation-indexed government debt averaged 2.3 percent in 2006 as compared with 1.85 percent in 2004. In the past few weeks, that yield has averaged about 2.4 percent. Inflation-adjusted yields in other industrial countries have also started to move back up after falling in 2005.8How does this all fit together? My reading of recent developments is that although some of the details have changed, the fundamental elements of the global saving glut remain in place. Most important, the emerging-market countries and oil producers remain large net suppliers of financial
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capital to global markets. The mix of suppliers of funds and the factors motivating that supply have changed a bit: China and the oil exporters account for a larger share of the developing countries' aggregate surplus, and developing Asia excluding China accounts for somewhat less. Also, the further expansion of the region's net supply of saving in the past two years appears to reflect primarily an increase in desired saving by the emerging-market countries, whereas the previous increase in net saving also involved some decline in desired investment in East Asia after the financial crises of the 1990s. Exchange rate policies in Asia have also influenced desired saving in that region.Further increases in net capital flows from the developing economies, all else being equal, should have further depressed real interest rates around the world. But as I have noted, in the past few years, real interest rates have moved up a bit. This increase does not imply that the global saving glut has dissipated. However, it does suggest that, at the margin, desired investment net of desired saving must have risen in the industrial countries enough to offset any increase in desired saving by emerging-market countries. This characterization is certainly consistent with the pickup in
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