A Savings Glut?


Ben Barnanke's explanation starts with something that I have known all along, but somehow have chosen to ignore: The Federal Reserve simply does not have the power to move long term rates: The best that they can do is determine short term rates: 1-6 months out. After that, interest rates are a function of the supply and demand for credit. 

So in Ben's view, we have a savings glut caused by an aging population - not just in the United States, but in China as well. More and more of us are living longer (that's a good thing) and for now, at least, we produce an ever larger volume of savings. That's a lot of investment dollars looking for a home, which drives interest rates down. 


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