Savings and Liquidity Gluts and the American Long-Term Interest Rates Before the Great Financial Crisis
Savings and Liquidity Gluts and the American Long-Term Interest Rates Before the Great Financial Crisis

Summary/Abstract: Objectives: This article examines the impact of the global savings glut on the long-term interest rates in the UnitedStates before the Great Financial Crisis. It presents the impact mechanics of global savings on interest rates, discussesarguments supporting and contradicting the significance of this phenomenon, presents an alternative concept, namelyglobal liquidity glut, and estimates the significance of both phenomena in shaping long-term interest rates in the USAbefore the crisis.Research Design & Methods: First, the impact of purchases of the US treasury bonds made by foreign investors onlong-term interest rates is being assessed. Second, metrics representing global savings and liquidity gluts are being usedto explain those purchases. Finally, a counterfactual exercise is used to reveal the impact that each of those factors hadon the American ten-year treasury yields.Findings: The statistical analysis of both effects shows that foreign purchases of the Treasuries lowered the US longterminterest rates by up to 140 bps, with excess global savings depressing them by approximately 45 bps, and excessliquidity by another 75 bps.Implications / Recommendations: Monetary policy, as well as savings rates, might have wider than only local consequences.Excess liquidity and savings in one country can impact interest rates in other areas.Contribution / Value Added: This article presents an alternative and neglected in literature explanation for the phenomenaof low long-term interest rates before the Great Financial Crisis in the USA, namely global liquidity glut that depressedinterest rates more powerfully than excessive global savings, contributing to the development of the investment bubbleon the housing market and, thus, the Great Financial Crisis.Keywords: Great Financial Crisis, savings glut, banking glut, liquidity glut, global liquidityArticle classification: research articleJEL classification: E210, E220, E510

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