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Bernanke says "saving glut" still valid hypothesis

Written by: Staff
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WASHINGTON, Mar 24 (Reuters) Federal Reserve Chairman Ben Bernanke said in a letter released on Thursday nothing had emerged to undercut his year-old hypothesis that a ''global saving glut'' was a factor behind the large U.S. trade gap.

''Nothing has occurred since March 2005 to diminish support for the 'global saving glut' hypothesis, and the factors contributing to this 'glut' generally remain in place,'' Bernanke wrote in a letter to Republican Rep. Mark Kennedy of Minnesota.

The March 17 letter, released by Kennedy's office, was in response to a written question submitted in conjunction with a Feb. 15 hearing on monetary policy held by the House of Representatives' Financial Services Committee.

Bernanke said while the U.S. trade deficit widened last year, ''the surplus of the developing economies is generally estimated to have widened as well.'' ''Much of the widening of the U.S. deficit and of the developing country surplus is attributable to higher oil prices,'' he wrote. ''Additionally, U.S. economic growth again exceeded that of a trade-weighted average of industrial economies in 2005, thus continuing to support the relative attractiveness of investments in the United States.'' Bernanke, who took office as Fed chairman on Feb. 1, had argued in a speech he delivered in March 2005 that an excess of saving relative to investment opportunities in the developing world had, in effect, washed ashore in the United States.

This ''global saving glut,'' he said in that speech, ''helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.'' He pointed to a number of factors that may have fuelled a ''saving glut,'' including a decision by developing Asian countries to build up foreign exchange reserves in the wake of the 1997-98 financial crisis and surging oil revenues in oil-exporting countries amid rising prices.

Most economists have tended to look at the burgeoning shortfall in the U.S. current account, the broadest measure of the nation's trade, as being driven by policies in the United States. The current account gap, which shows the United States consuming more than it produces, hit a record 4.9 billion last year, or 6.4 per cent of U.S. gross domestic product.

In a speech on Monday, Bernanke said the ''saving glut'' hypothesis was just one of a number of possible explanations for the unusually low long-term interest rates.

In that speech, he assigned no greater weight to his hypothesis than to other potential explanations and concluded ''the bottom line for (Fed) policy appears ambiguous.'' His letter to Kennedy suggests, however, he may give his thesis somewhat greater weight than the other explanations, such as the possibility that the term premium investors demand to cover the risk of losses on long-term holdings had shrunk.

Bernanke said on Monday that if the ''saving glut'' hypothesis were correct then ''global equilibrium interest rates -- and, consequently, the neutral policy rate -- will be lower than they otherwise would be'' as long as the factors behind the excess saving persisted.

The Fed has been raising benchmark overnight rates for 21 months hoping to get rates to a ''neutral'' setting, while keeping inflation risks in check. Fed officials are expected to bump overnight rates up for a 15th straight time to 4.75 per cent when they conclude a two-day meeting on Tuesday.

REUTERS SD PC1605

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