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Something I heard Greenspan and Krugman say regarding interest rates puzzled me...

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razerfish posted on Sat, May 8 2010 12:12 AM

Greenspan partly blamed or deflected the criticism of rates being too low by saying that part of the problem was that there was a glut in savings around the world and much of it flowed into the U.S.  Austrians and others, I'm sure, believe that savings determines the rate of interest.  But what if that savings is being supplied by foreigners and not Americans (say we have a zero rate of savings but the world supplies us with their savings).  Would that kick off the credit expansion and false signals if there was no monetary inflation involved, just lowered interest rates because of a world glut in savings? I'm not sure what to make of that.

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I am not an expert on ABCT at all, but isn't the main idea that, in a credit-induced boom, there are insufficient savings to support investments? Malinvestment is not a case of entrepreneurs getting stupid and investing in the wrong things; it is investment predicated on the existence of real savings, but which do not actually exist. Without real savings, the long-term investments are revealed to be unsustainable.

If the interest rate was lowered from real savings abroad, there would not have been malinvestment. There would have been savings to see the extravagant projects of the boom through to completion.

"People kill each other for prophetic certainties, hardly for falsifiable hypotheses." - Peter Berger
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The high order capital goods prices would not have fallen if the expansion of high order industries had been backed by decreased consumer demand.

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there was a glut in savings around the world and much of it flowed into the U.S.

But US banks and companies don't accept yen and euros. All that foreign money was therfor either 1] US dollars they already had or 2] was exchanged for newly printed US dollars or 3] for old US dollars. In the first two cases, it is inflation [ =money printing] coming home to roost. In the third, then it means money that bought the foreign currency was not being spent here, but given to a Chinaman who put it right into a bank here. So it is the same as if an American put it into a bank, and would not cause malinvestments.

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