As policymakers and investors continue to fret over therisks posed by today’s ultra-low global interest rates, academic economistscontinue to debate the underlying causes.  By now, everyone accepts someversion of US Federal Reserve Chairman Ben Bernanke’s statement in 2005 that a “global savings glut” is at theroot of the problem. But economists disagree on why we have the glut, how long it will last, and, mostfundamentally, on whether it is a good thing.

Bernanke’s original speechemphasized several factors – some that decreased the demand for global savings,and some that increased supply. Either way, interest rates would have to fallin order for world bond markets to clear. He pointed to how the Asian financialcrisis in the late 1990’s caused the region’s voracious investment demand tocollapse, while simultaneously inducing Asian governments to stockpile liquidassets as a hedge against another crisis. Bernanke also pointed to increasedretirement saving by aging populations in Germany and Japan, as well as tosaving by oil-exporting countries, with their rapidly growing populations andconcerns about oil revenues in the long term.

Monetary policy,incidentally, did not feature prominently in Bernanke’s diagnosis. Like mosteconomists, he believes that if policymakers try to keep interest rates atartificially low levels for too long, eventually demand will soar and inflationwill jump. So, if inflation is low and stable, central banks cannot be blamedfor low long-term rates.

In fact, I stronglysuspect that if one polled investors, monetary policy would be at the top ofthe list, not absent from it, as an explanation of low global long-terminterest rates. The fact that so many investors hold this view ought to makeone think twice before absolving monetary policy of all responsibility.Nevertheless, I share Bernanke’s instinct that, while central banks do set veryshort-term interest rates, they have virtually no influence over long-term real(inflation-adjusted) rates, other than a modest effect through portfoliomanagement policies (for example, “quantitative easing”).

A lot has changedsince 2005. We had the financial crisis, and some of the factors cited byBernanke have substantially reversed. For example, Asian investment is boomingagain, led by China. And yet global interest rates are even lower now than theywere then. Why?

There are severalcompeting theories, most of them quite elegant, but none of them entirelysatisfactory. One view holds that long-term growth risks have been on the rise,raising the premium on assets that are perceived to be relatively safe, andraising precautionary saving in general. (Of course, no one should think thatany government bonds are completely safe, particularly from inflation andfinancial repression.) Certainly, the 2008 financial crisis should have been awakeup call to proponents of the “Great Moderation” view that long-termvolatility has fallen. Many studies suggest that it is becoming more difficultthan ever to anchor expectations about long-term growth trends. Witness, forexample, the activedebate about whether technological progress is accelerating ordecelerating. Shifting geopolitical power also breeds uncertainty.

Another class ofacademic theories follows Bernanke (and, even earlier, MichaelDooley, David  Folkerts-Landau, and Peter Garber) in attributing lowlong-term interest rates to the growing importance of emerging economies, butwith the major emphasis on private savings rather than public savings. Becauseemerging economies have relatively weak asset markets, their citizens seek safehaven in advanced-country government bonds. A related theory is that emergingeconomies’ citizens find it difficult to diversify the huge risk inherent intheir fast-growing but volatile environments, and feel particularly vulnerableas a result of weak social safety nets. So they save massively.

These explanationshave some merit, but one should recognize that central banks and sovereignwealth funds, not private citizens, are the players most directly responsiblefor the big savings surpluses. It is a strain to think that governments havethe same motivations as private citizens.

Besides, on closerinspection, the emerging-market explanation, though convenient, is not quite ascompelling as it might seem. Emerging economies are growing much faster thanthe advanced countries, which neoclassical growth models suggest should pushglobal interest rates up, not down.

Similarly, theintegration of emerging-market countries into the global economy has broughtwith it a flood of labor. According to standard trade theory, a global laborglut ought to imply an increased rate of return on capital, which again pushesinterest rates up, not down.

Surely, anyexplanation must include the global constriction of credit, especially for small and medium-sizebusinesses. Tighter regulation of lending standards has shut out an important source of globalinvestment demand, putting downward pressure on interest rates.

My best guess is thatwhen global uncertainty fades and global growth picks up, global interest rateswill start to rise, too. But predicting the timing of this transition isdifficult. The puzzle of the global savings glut may live on for several yearsto come