Global imbalances: Private savings drive new risks

Global imbalances have been a persistent feature of the international financial system for the past three decades, with the United States and United Kingdom consistently running current account deficits, while China, Japan, and the euro area record surpluses.

These imbalances widened significantly before the Global Financial Crisis (GFC), narrowed post-GFC, but have recently widened again.

A key finding is a shift in the origin of surplus countries' savings from official to private sources.

Before the GFC, official savings, largely from foreign exchange reserves and sovereign wealth funds in Asia and oil exporters, significantly contributed to widening imbalances.

Today, private sector savings drive surpluses, while deficit countries see rising government debt.

This fundamental change in the nature of the 'savings glut' has profound implications for asset prices, risk premia, and safe interest rates, as private savings are intermediated differently than official savings.

The intermediation of private savings has shifted significantly towards non-bank financial intermediaries (NBFIs).

Unlike official institutions that prioritized liquidity and safety in US Treasuries, NBFIs now focus on returns and risk.

This drives higher demand for risky assets, compressing risk premia and encouraging greater risk-taking.

Emerging vulnerabilities include rising concentration risks and stretched valuations in tech assets, alongside increased price sensitivity and leverage in government bond markets.

The continuous buildup of net international investment positions, with the US as a growing global debtor, combined with these new vulnerabilities, raises significant concerns for global financial stability.