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Jimmy James

Interest Comment From Stiglitz On Interest Rates

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Another ingredient from China being thrown into the interest rate soup.

From the recent FT Q&A on the revaluation of the renminbi


"Q: What do you think of the Bernanke notion that the US current account deficit can be explained by a global savings glut? Is there anything wrong with developing economies like China providing a large portion of the pool of savings that finances US consumption and investment?

David Gilmore

Joseph Stiglitz: The US current account deficit is most directly related to the gap between domestic investment and domestic savings. The fiscal deficit has contributed, of course, to the low level of American national savings. The high level of savings in the global economy and the low level of investment helps explain why the United States can finance the trade deficit at such low interest rates. If China succeeds in encouraging consumers in its country to consume more and save less, the global balance of savings and investment will change; interest rates are likely to rise; but the American trade deficit will not be much improved - except if the higher interest rates lead to lower investment: not a pretty way for the trade deficit to be reduced.

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