An Alternative View of Finance, Saving, Deficits, and Liquidity

This article contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity, with the goal of shedding light on the current global financial crisis. It first briefy summarizes the orthodox view according to which global savings financed the U.S. speculative boom. Excessive growth of U.S. indebtedness was unsustainable, and matters were made worse by Fed monetary ease. The alternative view is based on Keynes's approach to finance and liquidity preference, integrated with the "modern money" view of currency sovereignty. It is argued that investment, budget deficits, and current account deficits create saving; on this view it is more revealing to think of U.S. current accounts as financing global dollar savings. Finally, an alternative interpretation of the causes of, and solutions to, the global financial crisis are offered.