Why would a low savings rate put downward pressure on interest rates?


In a recent article in the New York Times about free trade, the author talks about the negative impact on the US of low cost Chinese goods entering the market not being experienced by Germany and other European countries. The article goes on to explain that part of the reason is low US interest rates caused in part by a low American savings rate.

Why would a low savings rate put downward pressure on rates? If savings is capital available to be borrowed, and less savings means less capital available, shouldn't that put upward pressure on rates (everything else being equal)? Isn't that a fundamental economic principle? Restricted supply in the face of fixed demand = increasing price (interest rates)?


"Mr. Autor suggests that Americans’ low savings rate was a big part of the story, coupled with foreigners’ appetite for accumulating dollar assets, which helped keep American interest rates low and the dollar strong, in that way fueling a persistent trade deficit."


To a certain extent, the quoted sentence is tautological.

As an accounting identity, from the GNP accounts, the Balance of Trade (positive is a surplus) = (Savings – Investment) + (Taxes – Government Spending)

Hence, a balance of trade deficit, by definition, means savings is low relative to investment, or taxes are low relative to government spending (or both)

As an identity from the balance of payment accounts: [Balance of Trade Surplus + Capital Account Surplus] = 0 (assuming no government intervention)

Thus, under a floating exchange rate system, any balance of trade deficit has to be linked to a capital account surplus. In the context of the relevant sentence, low savings is associated with a balance of trade deficit, which in turn must be paired with a capital account surplus (the latter means foreign accumulation of US assets)

In terms of why low savings should mean low interest rates, I do not think that is the intent of the author. Rather, I think he is saying that the inflow of foreign capital (foreigners’ appetite for accumulating dollar assets) kept US interest rates low, which otherwise would have risen due to low savings.

Answered by
  • Emeritus Professor
Last updated on
May 18, 2023

Explore Our Programs

Interested in more answers or studying in the Department of Economics?