The importance of the global savings-investment equilibrium

The world is increasingly becoming a service economy. As services are less capital-intensive than industry, this development should reduce the global need for investment and capital, and therefore give rise to a situation of excess ( ex ante ) savings over investment. As a result, equilibrium real interest rates should decline. The following conditions would have to be met for this not to happen: Either the global private savings rate declines (which may be due to population ageing or a fall in China’s huge savings rate); Or the global fiscal deficit increases (a development that the policy now being conducted in the United States will contribute to). This thinking is crucial when considering a long-term asset allocation, and therefore when forecasting the trend in real interest rates in the long term.