Calculating US excess savings

The United States absorbed global and domestic excess savings from 1980 to 2007 by continuously expanding its liabilities.

Economies desiring to save over their optimum rate suffers underconsumption. To recover, they satisfy their excess savings by growing debt to GDP.

The U.S. economy met an extraordinary saving demand during this 27-year period by expanding its financial liabilities. But this dynamic has limits. The 2008 financial crisis revealed the fragility of a system dependent on debt issuance to absorb excess saving.

Real Investment vs. Financial Investment

A fundamental principle of macroeconomics is that savings must equal investment in a closed economy, and this relationship is mediated through the financial system in an open one. Sustainable saving is that which is channeled into productive investment, which increases the capital stock, boosts productivity, and fosters long-term economic growth. Each economy has a theoretical optimum saving rate that enables optimum level of investment to meet consumption. While an economy performs at the optimum level, it suffers neither underconsumption not underinvestment.

When an economy's desire to save exceeds this optimum level, it leads to a state of underconsumption. This weakness in aggregate demand creates a paradox where, despite high intended savings, actual investment opportunities diminish because businesses see a lack of current demand for their goods and services. Consequently, productive investment slows down and becomes insufficient to absorb the pool of excess savings (Bernanke, 2005).

Financial system must provide an alternative saving outlet when an economy produces excess savings. All financial savings are, by accounting identity, someone else's liability. If these savings are not financing new factories, equipment, or intellectual property (productive investment), they must be financing consumption or existing assets. In this environment of weak underlying demand, debt expansion is not channeled towards enhancing productive capacity but is instead directed towards sustaining consumption levels. This mechanism effectively cures the symptom of underconsumption through debt-based consumption, allowing aggregate demand to be maintained not by current income but by borrowing against future income. This process satisfies the savers' desire for financial assets by creating a corresponding growth in liabilities elsewhere in the system. The result is that the aggregate stock of debt grows faster than the national income (GDP), leading to a rising debt-to-GDP ratio (Mian & Sufi, 2014).

This dynamic is inherent in the dual nature of all financial products. For every saver who spends less than their income and acquires a financial asset, there is a borrower who spends more than their income and takes on a liability. Because each financial transaction increases an individual's savings (the asset) and another individual's debt (the liability) by an identical amount, the net saving for the country as a whole remains unchanged. However, the distribution shifts: the excess savings of one segment of the population are stored and represented by the growing debt of another segment. This is not a theoretical abstraction but an observable phenomenon. For instance, in the decades leading up to the 2008 financial crisis, a significant global "savings glut"—particularly from emerging economies and oil exporters—flooded financial markets with capital seeking returns (Bernanke, 2005). This excess savings helped fuel a dramatic rise in household debt in advanced economies like the United States, where debt-to-GDP ratios soared, as households borrowed against rising home values to sustain consumption despite stagnant median wages. Statistical evidence from the Bank for International Settlements shows that the global debt-to-GDP ratio has climbed from around 180% in the mid-1990s to over 250% in 2023, a trend that has continued despite brief pauses during crises. This long-term upward trajectory supports the idea that the financial system is persistently creating liabilities to absorb a persistent global desire to save in excess of productive investment opportunities.

Calculating excess savings absorbed by the US

Debt growth over GDP growth satisfies excess savings. To quantify excess savings absorbed by the U.S. economy, we analyze the growth of debt relative to GDP, using IMF data between 1980 and 2007. Since all debt reflects a form of financial saving, increases in total debt can be interpreted as a response to saving demand—whether domestic or foreign.

In 1980, the private debt-to-GDP ratio was 140.48%. By 2007, it had risen to 223.75%. This 83.27 percentage-point increase over 27 years implies that, on average, private debt rose by about 3.1 percentage points of GDP annually (Source: IMF Private Sector Debt – USA).

The public debt-to-GDP ratio increased from 41.27% to 64.65% during the same period.That’s an annual increase of 0.87 percentage points of GDP (Source: IMF General Government Debt – USA)

Together, private and public debt expanded at a rate of 3.97 percentage points of GDP per year—effectively the financial system’s response to saving demand.

Disentangling Domestic and Foreign Excess Savings

But who supplied this excess savings? U.S. residents? Foreign investors? Both?

Because financial assets are globally mobile, foreign saving can flow into domestic debt markets. The U.S. consistently ran current account deficits, implying that foreign savers helped fund U.S. debt growth.

To measure this, we examine net foreign debt, which reflects the U.S. liability to foreign savers:

• In 1980, U.S. net foreign debt was 0.0068 times GDP.

• In 2007, it rose to 0.3741 times GDP.

This increase of 0.3673 GDP units over 27 years equals roughly 1.4 percentage points per year. This amount represents the share of U.S. debt purchased by foreign savers—their contribution to absorbing global excess savings.

Subtracting this from the total debt increase (3.97% of GDP), we estimate that domestic savers accounted for the remaining 2.6 percentage points of GDP per year. Between 1980 and 2007, the US produced excess savings as much as 2.6% of GDP every year.

Implications: Was U.S. Excess Saving Really Excess?

The results show that the U.S. absorbed approximately 4% of GDP annually in excess savings, split between domestic (2.6%) and foreign (1.4%) sources.

But here's the catch: these were not savings stored in productive investment. They were largely channeled into consumption, housing speculation, and financial products—an unsustainable pattern that culminated in the 2008 crisis.

The excessive demand for financial instruments, driven by domestic and global excess saving, forced the U.S. financial system to engineer ever more complex ways to issue debt. As Ben Bernanke famously described in his 2005 speech, the “global saving glut” became a structural vulnerability.

Conclusion: Sustainability of Financially Absorbed Excess Savings

The U.S. economy met an extraordinary saving demand during this 27-year period by expanding its financial liabilities. But this dynamic has limits. The 2008 financial crisis revealed the fragility of a system dependent on debt issuance to absorb excess savings.

References

Bernanke, B. S. (2005). The global saving glut and the U.S. current account deficit. Speech delivered at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia.

Mian, A., & Sufi, A. (2014). House of debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again. University of Chicago Press.