Even for the most absentminded amongst us (myself included), life offers unforgettable moments. Some are historically and globally impactful: Neil Armstrong’s ‘giant leap’, the collapse of Lehman Brothers, or the COVID-19 pandemic we currently find ourselves in. Others are deeply personal: a first day at University, saying goodbye to a loved one or the birth of a child. For me, one such moment was a visit to Shenzhen in the early 2000s. Colloquially known as the ‘worlds factory’, this former fishing village has rapidly evolved in forty-years to become the manufacturing heartland of a global economic superpower. Whilst Shenzhen and more broadly China has become the hallmark of modern industrialization, their growth provides important clues into the secular decline of real interest rates globally.
In recent years, asset price growth has coincided with significant imbalances in global trade flows. In the aftermath of the Asian Currency Crisis in the late 1990s, developing nations accumulated significant reserves, experiencing a large and sustained swing in their aggregate net lending position relative to the rest of the world. Ben Bernanke, the former Chairman of the Federal Reserve, first introduced this hypothesis under the rubric of a ‘global savings glut’ in 2005. According to Bernanke, these lopsided trade imbalances have fuelled large capital inflows to the US and other industrialised economies seeking exposure to safe assets. Sophisticated financial markets and clearly defined legal and regulatory frameworks have made the U.S. in particular and other industrialised economies attractive destinations for global investors to park these surplus savings. In turn, this has lifted demand for treasury bonds, subdued borrowing costs and subsequently led to asset price inflation in stock and commercial real estate markets.