Michael Pettis defends Ben Bernanke’s global savings glut explanation of current account imbalances. Even if there are not excess savings globally, there are excess savings in certain parts of the world that likely explain imbalances:

If every part of the global system were completely rigid, a rise in savings in one part would result in a global rise in savings. But if at least one part of the system has a highly open and flexible financial system, it will act as the residual whose changes force the overall system back into balance. In the aggregate total savings and consumption may seem to have changed little, but what has happened is that an imbalance in one part has forced an equivalent but opposite imbalance in the other.

Not only does this seem to me an automatic outcome of excess savings, but it also seems to describe reality quite well. The US financial system is global in scope and so astonishingly flexible that it shifts very easily to accommodate global changes. If the rest of the world must produce more than it consumes (which is to say it saves more than it invests), the balancing entity must consume more than it produces as it absorbs those excess savings.

Read the full post and comments section for much more.