{
  "title": "Investment Restraint, The Liquidity Glut, and Global Imbalances: Remarks by Raghuram G. Rajan, Economic Counselor and Director of Research",
  "publication": "IMF News, November 16, 2006",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp111506",
  "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp111506",
  "overlayPath": "/en/news/articles/2015/09/28/04/53/sp111506/index.md",
  "summary": "Speech delivered at the Conference on Global Imbalances organized by the Bank of Indonesia in Bali, November 16th 2006.",
  "publishDate": "2006-11-16",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Speech delivered at the Conference on Global Imbalances organized by the Bank of Indonesia in Bali, November 16th 2006.\n- Argues three global ingredients explain low long-term real interest rates and large global imbalances:\n  - A widespread surge in productivity.\n  - A high desired savings rate, particularly supported by corporations and emerging market governments.\n  - Global investment in physical assets that has not returned to past levels (termed \"investment restraint\")."
    },
    {
      "heading": "The Productivity Revolution",
      "content": "- Key observations:\n  - Fourth year of strong world growth (context: speech dated November 16th 2006).\n  - Productivity growth fostered by information technology and global supply chains.\n  - Rapid worldwide productivity growth explains: strong commodity demand; ability of emerging markets to withstand commodity price increases; contained inflation despite rising raw material costs; buoyant household incomes and corporate profits.\n  - Emphasizes that productivity surges occurred not only in the U.S. (since 1995) but also in emerging markets."
    },
    {
      "heading": "The Rise in Desired Savings",
      "content": "- Findings on savings behavior:\n  - Household savings in many industrial countries have drifted lower, with exceptions like Germany.\n  - Industrial country corporations have increased excess savings (undistributed profit less capital investment) — see WEO September 2005.\n  - Drivers of corporate excess savings:\n    - Productivity growth not paid out to labor, raising corporate profits.\n    - Lower corporate taxes and decreasing dividend payments.\n    - Corporations maintaining large cash hoards amid increased firm-level volatility.\n  - Emerging markets:\n    - Governments running primary fiscal surpluses in some cases (supported by commodity export gains).\n    - Households increasing savings due to uncertainty and limited retail credit (example explicitly: China).\n    - Emerging market corporations, especially in natural resources, building excess savings.\n- Conclusion: continuing high desired savings among households, corporations, and governments—especially in emerging markets—is the second key ingredient."
    },
    {
      "heading": "The Fall in Realized Investment",
      "content": "- Central puzzle: despite high productivity and savings, physical investment remains subdued.\n- Explanations considered:\n  - Working off past excessive investment (e.g., telecoms overinvestment in late 1990s).\n  - Shift from hard physical assets to intangible investments (training, R&D) that are expensed and not easily tracked; but corporate profitability remains high.\n  - Capital goods prices falling (e.g., computers) — counterarguments:\n    - High depreciation rates of rapidly cheaper capital goods.\n    - If cheaper, firms should buy more, not less.\n  - Economic and political uncertainty deterring investment, especially in emerging markets.\n  - Offshoring: industrial-country firms investing more overseas (FDI in emerging markets near an all time high) rather than domestically; uncertainty about long-term predictability of non-industrial country environments may limit long-term, hard-to-move investments.\n- Conjecture: global investment restraint and limited greenfield FDI from rich countries to emerging markets may reflect political and economic uncertainty."
    },
    {
      "heading": "The Global Liquidity Glut",
      "content": "- Mechanism:\n  - Low flow of new collateralizable hard assets constrains debt issuance.\n  - If investment shifts to non-securitizable assets (e.g., firm-specific human capital), it reduces collateral available for finance.\n  - Result: mismatch between high desired savings and low realized investment creates a liquidity glut, pushing long-term real interest rates lower globally.\n- Market implications:\n  - Excess liquidity spills into existing real and financial assets (real estate, high-risk credit, private equity, art, commodities), raising prices.\n  - Illiquid markets have been pushed up most by small infusions of liquidity.\n  - Emerging market debt becoming mainstream partly because of shortage of new investible assets rather than solely improved creditworthiness.\n  - Easy refinancing can create self-fulfilling reductions in defaults and perceived credit risk.\n- Role of monetary policy and foreign official flows:\n  - Rajan argues G-3 accommodative policy is not the primary driver of low long rates; policy rate changes had limited effect on long rates.\n  - Foreign central bank purchases of U.S. assets reflect domestic savings-investment imbalances and are not necessarily the direct cause of low U.S. long rates (see Warnock and Warnock (2006))."
    },
    {
      "heading": "The Liquidity Glut and Global Imbalances",
      "content": "- How differences in domestic financial structures shape current accounts:\n  - United States: surge in productivity translated into late-1990s investment boom; since 2002 expansion more consumption- and real estate-focused, enabled by deep, arm's-length financial markets allowing borrowing against future incomes. Result: large current account deficit (also see WEO September 2006).\n  - Emerging markets: cautious investment after past booms and busts; limited housing and retail finance constrain household consumption; results in net savings/current account surpluses. Exception: India moved from surplus to increasing deficit due to a more vibrant financial sector.\n- U.S. financial innovation and securitization drew global savings into the United States, helping support the dollar amid a worldwide shortage of investible assets."
    },
    {
      "heading": "How Will All This End? (Scenarios and adjustment channels)",
      "content": "- Long-run tendencies:\n  - Low real interest rates may be more representative historically than the high rates of the previous three decades (see Catao and Mackenzie (2005)).\n  - Demographics (aging populations in developed countries) imply rebalancing must occur primarily in non-industrial countries.\n- Channels for adjustment:\n  - Increased foreign direct investment into emerging markets.\n  - Development of financial systems in emerging markets to intermediate savings into productive investment.\n  - Rising consumption as safety nets improve and retail finance expands, reducing desired savings.\n  - Demographically-driven changes forcing reversal of the perverse pattern of net capital flows from poor to rich.\n- Risks and dangers:\n  - Financial innovation creating too many assets of one class leading to gluts and abrupt corrections (example: US housing market correction risk).\n  - Agency problems in financial systems amplified by cheap and easy finance.\n  - Small changes in excess liquidity can cause large swings in prices of illiquid assets and valuations.\n- Policy implications:\n  - Ensure government policy does not impede adjustment; IMF efforts aimed at this objective.\n  - Continued caution is warranted because adjustments rarely proceed smoothly."
    },
    {
      "heading": "Conclusions and Policy Recommendations",
      "content": "- Summary conclusions:\n  - Fundamental forces—productivity surge, high desired savings, and investment restraint—explain both global imbalances and the global liquidity glut.\n  - Hope for gradual correction: long-term interest rates moving up slowly, exchange rates adjusting, and global imbalances narrowing without major blow-ups.\n- Policy recommendations and cautions:\n  - Facilitate the development of emerging market financial systems to channel savings into investment.\n  - Improve safety nets and retail finance in emerging markets to reduce precautionary household savings.\n  - Monitor and manage financial innovation to reduce the risk of asset-class overshooting and agency problems.\n  - Avoid government policies that impede necessary real and financial adjustments.\n  - Maintain vigilance given the potential for abrupt corrections in illiquid asset markets.\n\nRemarks by Raghuram G. Rajan, Economic Counselor and Director of Research, IMF. November 16, 2006.\n\n---\n\n\n References\n\n- People's Republic of China and the IMF\n- United States and the IMF\n- Speeches\n- Raghuram G. Rajan\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp111506"
    }
  ],
  "bullets": [
    "[Markdown version](/en/news/articles/2015/09/28/04/53/sp111506/index.md)",
    "[Structured JSON version](/en/news/articles/2015/09/28/04/53/sp111506/index.json)",
    "[Bundle manifest](/en/news/articles/2015/09/28/04/53/sp111506/bundle-manifest.json)",
    "Published: November 16, 2006",
    "Speech delivered at the Conference on Global Imbalances organized by the Bank of Indonesia in Bali, November 16th 2006.",
    "Argues three global ingredients explain low long-term real interest rates and large global imbalances:",
    "Key observations:",
    "Findings on savings behavior:",
    "Conclusion: continuing high desired savings among households, corporations, and governments—especially in emerging markets—is the second key ingredient.",
    "Central puzzle: despite high productivity and savings, physical investment remains subdued.",
    "Explanations considered:",
    "Conjecture: global investment restraint and limited greenfield FDI from rich countries to emerging markets may reflect political and economic uncertainty.",
    "Mechanism:",
    "Market implications:",
    "Role of monetary policy and foreign official flows:",
    "How differences in domestic financial structures shape current accounts:",
    "U.S. financial innovation and securitization drew global savings into the United States, helping support the dollar amid a worldwide shortage of investible assets.",
    "Long-run tendencies:",
    "Channels for adjustment:",
    "Risks and dangers:",
    "Policy implications:",
    "Summary conclusions:",
    "Policy recommendations and cautions:",
    "[People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)",
    "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[Raghuram G. Rajan](https://www.imf.org/external/np/bio/eng/rr.htm)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
  "alternates": {
    "markdown": "/en/news/articles/2015/09/28/04/53/sp111506/index.md",
    "json": "/en/news/articles/2015/09/28/04/53/sp111506/index.json",
    "bundleManifest": "/en/news/articles/2015/09/28/04/53/sp111506/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-27T10:55:39.011Z"
}