It is clear from Alan Greenspan’s autobiography, The Age of Turbulence – chapter 18, “Current Accounts and Debt” – that the former Federal Reserve chairman misunderstood the causes and underestimated the consequences of the extraordinary growth in the US’s current account deficit. Today’s policymakers must see through his mistaken analysis and adopt policies to restore balance to the global economy.

According to Mr Greenspan, the deficit was caused by the high savings rate of countries with current account surpluses, combined with their inability to find sufficiently attractive domestic investment opportunities. High savings and unattractive investments at home, occurring at a time of declining “home bias” in investment, resulted in a massive increase in investments from those countries into US assets, we are told. In other words, high savings abroad resulted in increased consumption in the US.