There is a theory running around some quarters that the financial crisis and world recession were caused by too much savings from countries like China and Japan. The theory runs that this excessive savings had to go somewhere so it wound up in a property boom in America, which eventually was unwound, giving us the crisis.
But this diagnosis totally fails to explain the main problem.
First, there is nothing bad about having lots of savings in the world economy. A higher level of savings will lead to lower interest rates and allow more marginal businesses to raise capital for their marginal projects. For example, if the world interest rate is 5% then only businesses with an expected return above 5% should get finance. But if the world interest rate drops to 3% then all of those business plans with an expected return between 3% and 5% should now be able to access finance.
None of this is a problem.
So to complain about too much savings still leaves the main question unanswered – why did the money go to the wrong place? There is nothing in inherent about Chinese savings that makes that money want to go into an American property boom. It could have gone anywhere. So the “too much savings” thesis fails to answer the main question.
It is true that low interest rates exacerbated the housing bubble. Once the money started flowing the wrong way, when you turn up the tap you get more money flowing the wrong way. But even then, it is unfair to blame savers for that. You need savers in financial markets and there is no objective right or wrong level of savings. The right amount is whatever is good for the savers, and the borrowers will adjust to that.
If we want to blame anybody for “turning up the tap” then the blame rests with the US federal reserve. Between 2003 and 2007 they kept monetary policy too loose and interest rates too low, allowing inflation to build up in the economy. At least the Chinese savings was real money. The extra money pumped in by the federal reserve was never sustainable and would always require a correction.