I’m wondering if there will be a bidding war for that cash as everyone tries Keynesian stimulations all at once.

But what about if the process of deleveraging continues? Doesn’t it mean that the increased saving rate of US households will diminish their indebtness but will not increase credits? Or maybe it will be used to buy US bonds by banks but they will further decrease lending to private companies (US government will crowd out them in the deleveraging process)? So the nett effect would be additional requirements of abroad funding?

I am an ethnic Chinese myself. Having lived for a long time with people from different regions, I can say that there is definitely differences in the cultures in terms of saving habits.

Given everything else being equal, there is a much higher tendency for the Chinese to save comparing to their Western counterparts. This is the case EVEN if both have the same income, same reserve, same prospects, and the same safety nets.

For example, if we look at a typical Chinese person from Hong Kong, even in the exuberant 80’s where extravagant spending habits were everywhere to be seen at the time, it is almost unheard of for anyone to spend beyond what they can afford.

This is certainly not the case in the West. There are no shortage of people in the US happy to spend on credit that he/she may or may not be able to repay. In fact, the drawing down of home loan mortgages to fund expensive lifestyles have become quite common in recent years.

Michael: To that extent, I agree with your comments, although to say further on that you don’t agree that China is overproducing and the US overconsuming is a little strange since both clearly are. That is what the trade account tells us.

The fact is that the US is saving little, China is saving a lot, and we have a huge trade imbalance.

However to say that this is overconsumption and overproduction implies that the optimal situation is a net zero trade balance, and that isn’t obvious to me that this is the situation, and it’s hard for me to find someone state clearly why zero trade balance is the optimal situation, and I can think of some obvious reasons why it may not be.

Same goes true with the statement that China invests too much and consumes too little. It’s not self-evidentally obvious what the optimal rates of Chinese savings and investment are.

Also correlation is not causation. It’s true that US household savings rates went down when Chinese reserve accumulation went up, but there were also fifty other things that were going on at the same time.

Something that actually helps me figure separate out causation from correlation is to look at my own behavior and to true to figure out what the drivers of on my own behavior. In my own case, savings rates end up being where they are because incomes are stagnant and volatile and house prices were going crazy. Similarly, I don’t think you are going to understand why a Chinese household saves so much by looking at tables of numbers. You get better data by finding someone on the street, and just asking them how much they save and why.

sharpe_mind: We should remember that the US savings rate was only low when using the narrow definition of saving through bank deposits and the like, not when measuring by overall net wealth which includes all assets (assets which were one of the US’s strongest exports).

The problem is that those assets included house prices and stocks and those are tanking. This is why I think that the US wasn’t overconsuming, it was just that what savings there was being directed at the wrong assets. Fundamentally, the important driver of economic growth is productivity, and there were enough productivity gains between 2001 and 2007 to sustain US levels of consumption.

Americans have swung from periods of high to periods of low savings, and I think it has usually been easier to point to changes in economic conditions than to posit sudden cultural transformations. I am impressed by the fact that Americans suddenly stopped saving after 1998, but I don’t remember anything in the air that suddenly changed our cultural predispositions. I find it far simpler to point to the 1997 Asian crisis and posit that the Asian determination to increase reserves had to have a counterbalance, and that counterbalance was rising US consumption.

Culture matters in the sense that experiences matter: Americans who grew up in the Depression, like Chinese who grew up in the Cultural Revolution, seem far more predisposed to caution, including saving, than Americans born after WW2 or Chinese born in the late 1980s or thereafter.

Thirdly, any “cultural” explanation for Americans’ low savings rates is being proven wrong at this very moment. Household savings rates are rising dramatically.

The drivers for household saving in China seem to be 1) sharply rising incomes 2) lack of social safety nets 3) lack of high yield financial instruments and 4) low inflation. In the case of the United States we have 1) stagnant incomes 2) adequate social safety nets 3) financial assets that seem to be safe and high yielding and 4) low inflation. In essence, the high savings rate in China is to make up for low expected yields, whereas the low savings rates in the United States is based on the assumption of high yields.

Also this fits nicely with what cultural explanations seem to exist. I think if you ask someone in the US born in the 1930’s what they think the yield for the stock market will be, you will get a very different answer than someone born in the 1980’s. The other thing is that because the Chinese stock market and real estate market has boom-bust cycles, everyone I know thinks of them as playing the lottery and no one I know in China expects stocks and real estate to be the core of their retirement savings or children’s education fund.

What happens next I think will largely on how expectation change, and it’s far too early to see what happens.

Estragon, you are right. So how do we make this simple fact more widely understood?

David, it doesn’t really matter where the investment preference is. If people want to save they can buy Treasuries or, if they don’t like the yield, they can buy risky assets thereby driving down the spread until someone along the way does the buying of Treasury bonds. Right now I am not so worried about rising rates unless they are driven by a resurgence of inflation, in part for the reasons I discuss with TM.

Fatbrick, I worry about that too, but the good news is that Obama’s advisors are probably a lot more sophisticated. We will see.

RBG, like most central banks the PBoC keeps its investment portfolio highly secret.

TM, I am not sure higher interest rates will be a problem. If they are, that is probably good news because it means that the UWSG is competing with businesses for funding. My fear is that businesses won’t be interested in raising money.

Tyrasun, I think this is still a minority view but I am glad to say that more and more people are discussing it. For example there is an excellent piece by George Wehrfritz in this week’s Newsweek that addresses it.

Twofish, you misquoted me by saying that I am arguing that “Washington desperately needs Beijing to keep buying American bonds, so that the U.S. government can run up a deficit and launch its own fiscal stimulus.’ It is Zakaria who said that and the whole purpose of my article was to argue that this is not true. To that extent, I agree with your comments, although to say further on that you don’t agree that China is overproducing and the US overconsuming is a little strange since both clearly are. That is what the trade account tells us.

Part of what makes this interesting is that we are all making this up as we go along.

My sense is that Treasury rates won’t go up unless until it’s clear that the economy is recovering at which point you can pay for the deficits by raising taxes. That’s easy to say now, but it’s likely going to be extremely hard to do if we get the economy moving again. The difficulty with fiscal stimulus is that it is hard to turn off once it has outlived its usefulness, which means that you can very easily get into another bubble. However, getting into another bubble is I think a far less dangerous outcome than the alternative which is Japanese style stagnation.

There is supposedly a conversation between Keynes and the Austrians in which Keynes asked the Austrians while they were intent on keeping the economy in constant state of quasi-bust rather than a state of constant state of quasi-bubble.