With the tense start of China’s parliamentary season this afternoon – and with the National People’s Congress meeting Thursday – there isn’t much incentive to try to figure anything new out in China since we are likely to be given a lot more information and proposals over the next few days. What are the major topics likely to be covered in the meetings? I suspect that this article from yesterday’s South China Morning Post, on the topic of unemployment, gives a pretty strong hint:
If this is not addressed, it will be even more difficult for the government to maintain social stability down the road if unemployment remains high. China’s official urban unemployment rate is expected to be 4.6 per cent this year, which would make it the highest since 1980 when figures first began to be collected.
But, economists, including Zhou Tianyong from the Communist Party’s Central Party School, forecast that the real unemployment rate could reach 14 per cent, counting migrant labourers.
Senior officials estimate that up to 20 million migrant labourers have already lost their jobs because of the global economic crisis. They were mostly laid off by private firms and foreign-funded enterprises, the hardest-hit sectors.
I was told privately by a friend of mine two days ago that the number of migrant laborers who have already lost their jobs is actually closer to 30 million, but nonetheless Mr. Zhou’s comments reinforce some other claims to which I refer in a piece by me in the current Newsweek:
Although official estimates put urban unemployment in China at just over 4 percent of the workforce, most unofficial estimates are much higher—closer to 8 percent—and nearly everyone agrees that the figure is set to rise significantly in the next few months. Some credible estimates suggest that even if China were able to achieve the 7.5 percent growth projected in 2009 by the World Bank, unemployment would nonetheless double before the end of the year.
Clearly unemployment is going to weigh heavily on the minds of policymakers in China, like in the rest of the world, and we will have to wait and see what specific new measures are proposed over the next few days. Meanwhile I did nonetheless want to make a few comments about interesting stuff I’ve seen recently.
The first is a reference to an article in yesterday’s Financial Times, “Asean split on protectionism,” which highlighted the difficulties of getting leaders to agree on free trade even during a conference whose primary goal was to defend free trade:
As south-east Asian leaders gathered on Friday for their annual summit, the region’s united front against protectionism was starting to crack under the pressure of the global economic crisis. The fight against protectionism is top of the agenda at this weekend’s meeting of the 10-country Association of South East Asian Nations, which on Friday signed an agreement cutting tariffs and other barriers with Australia and New Zealand.
However, the leaders appeared far apart in pre-conference comments on the balance to be struck between sustaining open markets and promoting economic activity at home. In the most forthright remarks, Abdullah Badawi, Malaysia’s prime minister, said every country had the right to encourage its citizens to buy local products.
“I think it is a normal reaction under this kind of situation. First of all we have to protect our people; we are doing the same thing. If we do not create projects by Malaysia, for Malaysians, then who will buy our products?” Mr Badawi told the Bangkok Post newspaper.
For some of my readers I may be beating a dead horse, but as usual I will put up my warning that we need to be very aware of the deterioration in global trade relations that is likely to be a consequence of the rising unemployment everywhere in the world. The fact that even in a region heavily dependent on exports it is so easy (and so natural) to make the case for protectionism doesn’t bode well for trade discussions in North and South America, Europe and Australia. The article goes on to say:
Lee Hsien Loong, Singapore’s prime minister, said Asean might miss its target of establishing a regional economic community along the lines of the European Union by 2015 if member states failed to maintain open markets. “In this global environment, if we give the impression that Asean is not fully open for business I think we will be the losers when the new landscape emerges,” Mr Lee told CNBC.
Most of the regional economies have built their prosperity on the back of export growth, and the slowdown in the US, Europe and Japan has hit them hard. “I think we all worry about protectionism, and not just from traditional channels,” said Mari Pangestu, trade minister for Indonesia. In spite of Mrs Pangestu’s reservations, Indonesia is encouraging civil servants to buy Indonesian products, an echo of Barack Obama’s Buy American campaign that angered so many both within and outside Asia.
It may seem like a non sequiter to follow up with a second Financial Times article from yesterday, this one called “Emerging market finance: a gap to fill,” but bear with me:
Two years ago, nearly a trillion dollars flowed into emerging markets as investors in rich countries toured the globe in the hunt for yield. Now there is a melancholy long, withdrawing roar as private capital flees to safer havens.
…Net capital flows to emerging markets will drop to just $165bn (£115bn, €130bn) this year, down from $929bn as recently as 2007, according to estimates by the Institute of International Finance, which represents the world’s leading financial companies. Net lending from commercial banks, the IIF says, is likely to go into reverse. The reasons for this are not altogether straightforward. Some accuse rich governments, particularly the US, of “crowding out” emerging markets, sucking up all the available capital to finance their stimulus packages. But Brad Setser, a former International Monetary Fund and US Treasury official, notes that as the private sector retrenches, the US current account deficit – and hence its need for outside financing – has actually been declining.
More likely, he says, is that emerging markets are being hit by a general decline in demand for riskier assets, as banks and investors haul money back home to shore up balance sheets and reduce borrowings. Similarly, the global shortage of the trade credit that finances cross-border commerce reflects a general desire of banks to reduce leverage, not the rich countries hogging all the available loans.
Why is this relevant to a blog on Chinese financial markets? Because if annual net capital flows to emerging markets drop by the projected $700-800 billion, an inevitable consequence is that foreign currency reserves plus net imports for those emerging market countries will also have to decline by exactly the same amount. In other words while some of this decline will be accommodated by a running down of central bank reserves, we should expect a very large decline in net imports among those developing countries, to add to the decline in net imports from North America, non-German-Europe and other trade-deficit-countries. Needless to say this decline in net imports must have as a necessary corollary an equal decline in net exports in the trade surplus countries.
My final comment – hinted at in the title – is on Paul Krugman’s Op-Ed piece in today’s New York Times. he starts off by discussing the viciousness of the global crisis and then goes on to ask (and answer):
How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come. The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.
In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world. The result was a world awash in cheap money, looking for somewhere to go.
Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.
I have written often about the savings glut hypothesis and my very strong belief that it lies at the heart of the fundamental global imbalance of the past decade, and I think it has extremely important consequences both for our understanding how the crisis will evolve and what are the likely consequences to the major players involved in the imbalance. I am a big admirer of Krugman’s and have been for fifteen years – in the 1990s I used to read everything he wrote, and often within days of his publishing it – so I am delighted that he seems to agree with Bernanke’s thesis, but I should add that I believe the evidence in support is so overwhelming that even if Krugman decided to deride the whole notion, I would remain convinced that the sudden and massive rise in Asian net savings following the 1997 Asian crisis was a prime cause of the corresponding and necessary decline in US savings.
I know I know, this is going to be considered a very controversial statement – and inevitably someone will very stupidly demand to know why I am blaming China when obviously the full blame for the crisis should fall on the US – but there it is. I just don’t see how recent events can be explained without the Asian Crisis of 1997 having played a major role. At least Krugman seems to agree. At any rate he finishes worryingly with:
And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust. One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.
With all due respect, is it something in American’s blood? If something went wrong, there must be someone else to be the cause of the problem. I am thinking this is unrelated to economics but psychology. Every problem must be someone else’s fault, isn’t it?
Anyway, I am going to predict that you will comment on many stupid proposals emerged from the two conferences in the next few days and link everyone of them with protectionism.
One comment on unemployment and social stability, as far as I knew, many countries have found the social unrest to be their biggest fears this year. Developed or developing countries, they all faced the same problems. This would definitely increase the likelihood of trade war. But from another perspective, every government can blame unemployment on foreign countries and reduce its own pressure.
Last, there are different kinds of trade, not everyone of them needs the developed countries’ currencies as the payment currencies. I know that barter is not very popular now and has its own problems. But the demand from EM markets is there and people will find a way to go around the obstacles.
Oh, I forgot to mention, that your bar in Beijing was nice. A little bit difficult to find at first, but nice. Although I am not that into heavy metal music, nice to chat with you around new year.
Another fascinating article Professor. What’s curious to me is the last part, about the savings glut still being out there. In fact, it will become much worse because everyone will save. What the 1997 crisis did to the Asian, this crisis will do to the American, the European etc… On the other hand, it seems to me that your thesis, if I may call it yours, is not based solely on the savings glut, but on the combination of a savings glut in the East and binge spending in the West. But if, as I think it is fair to conclude, EVERYONE is saving, what will the effect be?
in economics, saving is no more virtuous than spending. In fact, there are no virtues in economics. the faster everyone realises this, the better off we’ll be.
It’s clear that the current crisis was caused by too much “liquidity” in the financial markets. Lending standards eroded, leading to over-investment in real estate and over-leverage on Wall Street. The cracks opened up in subprime and – boom – the whole structure collapsed.
I think you are correct to identify the source of the excessive liquidity as imbalances in the real economy. A big part of this is the trade deficit (about 5% of US GDP flowing through US financial markets). I suspect, though, that household income polarization in the US accounts for an even larger portion of the savings glut – perhaps 10% to 15% of GDP.
In some sense, the problem doesn’t really go away until the imbalances in the real economy are addressed. Obviously, a shift toward more balanced global trade would help (at least in the US). Income inequality may be the harder problem to address.
FDR tackled income inequality indirectly, by promoting development of the poor South and West, by supporting higher labor wages, etc. This time, we may need to resort to more redistributive progressive taxation.
You are quoting protectionist remarks made by Malaysia’s prime minister. It should maybe be added that Malaysia already has a history of protecting its industries from too much foreign competition. Proton is a high-profile example.
I’m confused by the statement that net foreign capital flows to emerging markets are decreasing from 929 bn $ to 165 bn $, and that this will decrease import demand.
Doesn’t a “net foreign capital flow” of 929 bn $ mean that there was a current account deficit of 929 bn $ in 2008?
If so, how can that be? “Emerging markets” as a group had a current account surplus in 2008 (if China is included as an “emerging market”, which I presume it is), so the “net capital flow” must have been negative, no? (as in: emerging markets were net investors relative to the rest of the world, which is just another way of saying that they financed most of America’s current account deficit)
Or am I getting the terminology wrong, and “net foreign capital flow” doesn’t mean what I think it means?
Concerning the “savings glut”:
If I understand corectly, most of China’s savings is not done by private household, but rather by companies retaining their earnings. If so, wouldn’t the slowdown and its impact on corporate profitability sharply reduce China’s savings rate?
(And to extend the same argument to the US: Doesn’t the gigantic 30 bn $ operating loss of GM reduce the US savings rate? 30 bn $ is nearly 0.2 % of GDP, so GM by itself is already a noticeable amount on the macro level)
Doesn’t invalidate the “savings glut” argument, which makes perfect sense. But I wonder if the effect of the brutal slowdown on corporate profits isn’t some kind of self-correcting mechanism that will – together with government decifit-spending – eventually bring savings and investment back into balance.
Yes, there was a huge savings glut. However, who would you blame for it ending up in excessive real estate speculation. Would’nt it be great if it had ended up funding alternative energy research, global warming research, cures for AIDS and cancer?
The blame for this savings glut ending up in excessive real estate investments lies squarely on the shoulders of the Fed and the other anglo-saxon central banks. You cannot blame the savings glut for lax lending policies, poor supervision, mortgage fraud, etc.
We always seem to come back to the point you made in a previous post( The fun part – assigning blame )you mentioned that ;
“When any part of the financial system is constrained from taking on risk, the market simply evades these constraints in one of three ways: It innovates around them, it generates or develops new and unregulated parts of the financial system, or it conceals regulatory violations.”
A bubble somewhere, or everywhere, was inevitable so long as there was excess liquidity. IMO the focus on sub prime as the culprit has delayed addressing the underlying cause.
BTW that Jan 7th posting remains the most insightful opinion on the crisis that I have encountered. Paul should be reading you.
Another concern in SE Asia might be a round of competitive devaluations or interest rate cuts, similar to Europe’s behavior at the start of the Great Depression.
Also, there are millions of foreign migrant workers exchanged between SE Asian countries each year, and often these are the first to lose jobs when government stimulus plans favor local workers. When millions must return home jobless, what effect will that have on regional stability and integration?
I’m no trickle-down economist, but it seems that the best route for stimulus in the region is business (rather than private) tax breaks, and import subsidies, rather than infrastructure plans that favor local business and workers.
Very well written comments and key to what takes to get the global economy out of this trouble.
Nevertheless, still suffering from the same eco-heads cloudiness in thinking. Your are confusing the conditions that existed such as such crises can develop, not the cause. The real cause was the negligence of banking regulators in the US and Europe, and lending de force without consideration for the worthiness of the borrowers.
People like us saw the housing crisis in the US coming since 2005, we engineers and scientists without any eco-background knew something was terribly wrong. So we stayed on the sidelines. Bankers, as always with their hazy thinking, as the regulators, were totally detached from reality. Whereas our masters with legions of minions and loads of data were simply blind, or deliberate, in driving the economic train over the cliff. The good thing is without buying that zillion dollar house, my family can last well over this Grande Depression.
(By the way, looking how bankers and regulators are still behaving there is no way that we have a fix to the problem currently. The day of recovery will come when we have bankers and regulators talking about their business just like any other business.)
Saving? If I have something and I want to keep it and keep its value, and maybe get some return, that is saving. In emerging countries reserves case, I just don’t see these attributes.
I want to fly high, but last time I landed hard and it was painful. I need a parachute! Parachute glut!
The NPC will talk about employment and putting the people first. It will be laden with slogans and policies that do not stand a chance of achieving their stated goals. The reason is that despite years of socialist rhetoric, we are going to be seeing cultural “mean reversion” in China, and that means, as Beijing’s Hong Kong cousins put it, that the government will serve society by serving businesses. There is a deep aversion to social protections in China, not just because of arguments about incentives, but also because in an orderly Confucian universe, a peasant is a peasent, and he lives a peasant life. Each has his or her place, and should just accept the natural order and resultant obligations. Despite being a British hero, Keynes was reviled in Hong Kong on moral intellectual ground. Most people talking about what to do with China’s economy today are the same as they were more than 5 years ago, and for a government that can order the construction of a city in 8 months, they have chosen not to invest in social infrastructure for decades. Guo fu min qiong; someone must want it that way.
this issue of saving glut is superficial idea now, the more fundamental problem are in economic-social-political regime in Asia and anglo saxon system:
In Asian, the addiction for growth and over-regulation of financial system resulting in series of economic, financial and political arrangement that encourage saving, suppressing domestic consumption while promoting capital formation and export.
In US, the addiction for growth and lack of regulation of financial regime encourage excessive consumption, housing investment all financed with massive leverage.
Exchange rate and/or trade policies are not that relevant in the rebalancing. The rebalance is being achieved through a massive global depression decimating the 10-20% GDP excessive consumption- housing investment in Anglo saxon and destruction of 10-20% GDP relating to export-Capex in Asia sytem.
Though theretically possible, but it is already too late for more benign and effective structural reform to be worked out. Such as reform US medical regime to reduce costs, or Chian’s rural reform, medical care-education-social security regime to reduce saving
Whether decision makers in US-Asia like it or not, or adopting whatever cyclical policies to cushion it, the world is rebalancing savagely: excessiving saving and debt are being deleveraged away, excessive consumption-housing whacked, capex are being idled or vaporized. All these are happening in lightening speed, violently and destructively, irreversiblly.
The current global economic crisis will be a godsend for the ordinary Chinese, if the threat of unrest forces the Chinese government to redistribute wealth on a large scale and improve the social safety net substantially. The withdrawal of foreign direct investments is not a bad thing either, if you consider the unsustainable urban-rural inequality this kind of investments has brought to China.
Krugman did not address the crucial role the Fed played from 1998-2008. Bernanke kept the interest too low for too long, because he believed that he could solve any problem by “throwing out money from a helicopter.” I am afraid that the Fed’s loose-money policy is one of the most important causes of the current crisis. If the easy money from China played a role, it was a minor one – it probably lowered the interest rate by 1.5% on average at most.
Krugman is an idiot and his keynesian thinking has been proven wrong time and time again. There is no free lunch. Savings are a good thing.
“The government cannot give to anybody anything that the government does not first take from somebody else.”
-John Gault
I think you miss here Michael. I think Bernanke misses and all others miss as well. Read a book called the Monetary sin of the west by Jacques Rueff. Start putting the pieces together about what he says. For one, he says that when a country has a reserve currency, the money really never leaves the country of the reserve currency, but instead is loaned right back to it. I believe China used their imported dollars to buy treasuries and used the treasuries as the Federal REserve uses the treasuries to mark their money to the dollar. Thus the money goes right back to the US and never leaves the country and is saved and not saved at the same time. Capital inflows amplified this stuff. Because credit was available in the US, flows continued to China, but the savings were double, the treasury bond held by the CB and the money issued by PBC to whomever received it. I believe it is nonsense that people making such small incomes in general are saving so much money, as it costs to build homes, own cars and all the other things that go on. Instead, I believe the upper class and the multinationals have found a way to impound money in China. The US consumer borrowed money because he could and the reserve currency doomed the US to have no mechanism of balancing trade. Read Rueff and see how accurate and strong his warnings were. I believe the next game is going to be a couple of gulls fighting over a dead fish, as in who is going to take whose money? Could the capital outflows from Asia be the dead fish?
Thanks for the interesting comments. I still find it very hard to accept that savings in China/Asia is THE major cause (lies at the heart of the fundamental global imbalance of the past decade) of the crisis we are in today. The key issue really is the failure of the most sophisticated financial and economic systems in the world to invest the available fuunds so inefficiently and ineffectively to the detriment of the suppliers of the funds and the global economy. It seems quite inappropriate to then turn around and say “you should not have given me the money in the first place”
Oh my god!i know how chinese officials and media are gonna react..poor krugman
The current problem of course is that not only do we have a paradox of thrift but the transmission mechanism from savings to investments (the banking system) is completely seized up due to not knowing whether it is solvent and is engaging in precautionary savings (or is that recapitalization) in the interim.
Check this out. http://www.foreignaffairs.org/20090101faessay88111/harold-james/the-making-of-a-mess.html
Supports your idea about the savings glut. You may already have read it. Question: How do we deal with it?
Thanks,
Michele Scrimenti
PS I’m a big fan of D22.
The debt explosion in the U.S. began in 1980 with Ronald Reagan’s supposedly self-financing “supply side” tax cuts. Corporations and consumers followed along. There is every indication the American debt explosion would have happened without a trade deficit or any external “savings glut.” We do easy money well.
Krugman is uncharitable, blaming the Chinese for giving us charity (as it will certainly turn out).
Krugman’s retro-Keynesianism has a bellicose edge to it. There is already thinly veiled talk from Evans-Pritchard and others that if and when the dollar tanks, the U.S. military will go and take what America needs from the world. This is hardly in the spirit of “The Economic Consequences of the Peace.”
And there is no paradox of thrift if the saved dollars are invested, either privately or in government investment spending financed by debt.
Thanks for the interesting comments. I still find it very hard to accept that savings in China/Asia is THE major cause (lies at the heart of the fundamental global imbalance of the past decade) of the crisis we are in today. The key issue really is the failure of the most sophisticated financial and economic systems in the world which invested the available funds so inefficiently and ineffectively, much to the detriment of the suppliers of the funds and the global economy. It seems quite inappropriate to then turn around and say “you should not have given me the money in the first place”
I also hate this term “savings glut” it is repeat with terrible imagery. To me it congers up pictures of greedy peasants with armfuls of dollars and broadly grinning faces.
The concept of gluttony and the idea of savings are just terribly at odds. The Chinese person saves because he knows he will need the money at some time in the future when the present conditions no longer allow saving. He is prudently making allowance for an uncertain future. Prudence that was forgotten in the West.
That such prudence is given negative spin by the West and called gluttony as if it was motivated by greed and irresponsibility is really an ultimate irony when you consider the behavior of the true perpetrators this mess, our very own “masters of the universe”.
I don’t care how macro economists want to try to spin it I’m not going to feel stupid any time soon on this count.
Professor Pettis,
Say you are a thrifty man, and deposited 100K in a bank. I, on the other hand, want to run a sound investment, and only need 50K. However,the bank insisted on lending me all 100K, with no better use of the money. Then, I fucked up, and lost it all. Who’s fault? Is it your fault?
-Mo
The “savings glut” concept is difficult for people to accept because most consider venues of savings as a kind of natural entitlement of which the management they or their governments are not responsible for. This deposit and forget attitude enables all kinds of financial hoaxes and crimes. It takes hard work to find vehicles to store value yet every approach has its risks. Paying a 50% premium for being able to defer for multiple years the consumption of the remaining 50% is not unreasonable when one does not take direct charge of those vehicles. Hoping to gain from deferring consumption alone is indeed gluttony. It turns out that only criminals and ponzi scheme masters can offer such free lunches for these free-rider-wanna-bes. When a true peasant saves, he put aside some grains to sow and some to sustain him until the next harvest. Cares must be taken to tend the land as well as the store house. Savings become gluts when savers are careless.
Michael, I agree with your analysis of the imbalances and how this depression is evolving in China, BUT here is what puzzles me about the US-centric view of the “savings glut” described by Bernanke: empirically it clearly existed and persists, but since it takes two to tango, how can anyone determine the causation here, in either direction…? E.g., chronologically, it seems pretty clear that Greenspan’s initial bubbles and the advent of the Greenspan Put preceded the Asian Crisis. US equities were being inflated by the mid-90s: remember the Netscape mania circa 1994 and Greenspan’s notorious “irrational exuberance” speech and his hyping of US “productivity gains”? The Asian Crisis in 1998 induced the Fed’s massive easing that inflated the tech/Nasdaq bubbles but not due to savings – it was another pretext for ever cheaper money from the Fed! The dramatic laxity of US monetary policy for 18 years under Greenspan, and the equally dramatic Bush tax cuts that accelerated US governmental dissaving – can’t one plausibly claim that these caused the global imbalances? In what way did these irresponsible policy decisions in the U.S. depend upon the existence of Asian savings – except that the Asian savings facilitated the advent of US Ponzi finance and the political illusion of continually exanding US wealth….?
The savings glut is a problem not because of Asian individuals saving. It is a problem of Asian central banks ‘saving’.
Rising currencies should have slowed the savings rate in Asian, but the CBs decided to keep their currency too low either by flooding the forex markets with their own currency (Japan) or pegging to the dollar and blocking free exchange (China). I think the savings glut is more about keeping down currencies to support exports, rather than paranoia about forex risk after 1998. That may be how it started, but it took on a life of its own as an export stimulating policy.
Thomas: If I understand corectly, most of China’s savings is not done by private household, but rather by companies retaining their earnings. If so, wouldn’t the slowdown and its impact on corporate profitability sharply reduce China’s savings rate?
The mix of Chinese savings now is about 50/50. However corporate savings are important because they were a new source of savings. During the 1990′s, state owned enterprises were a net drain on the economy, but this changed in the late 1990′s.
Also SOE profits will likely go down and this will reduce savings, but this is precisely why savings are a good things. If you don’t have savings then when you have an economic shock, you must fire workers, you have no choice and this makes things worse as demand dries up. If you have savings, then you can keep workers employed for a while even if you have to take a loss, and this keeps things from spiralling downwards.
There have been massive job losses in export industries for migrant workers, but not in SOE’s, and if you can get SOE’s and their employees to spend more money or get the banks to start loaning out more money, then this will create new jobs for the migrants.
Pettis: Why is this relevant to a blog on Chinese financial markets? Because if annual net capital flows to emerging markets drop by the projected $700-800 billion, an inevitable consequence is that foreign currency reserves plus net imports for those emerging market countries will also have to decline by exactly the same amount. In other words while some of this decline will be accommodated by a running down of central bank reserves, we should expect a very large decline in net imports among those developing countries, to add to the decline in net imports from North America, non-German-Europe and other trade-deficit-countries. Needless to say this decline in net imports must have as a necessary corollary an equal decline in net exports in the trade surplus countries.
But this may be completely irrelevant to China. Part of the problem with talking about “emerging markets” and “trade surplus countries” is that you end up lumping together countries like Saudi Arabia and China, which have vastly different economies.
What has happened is that when oil going from $200 to $30 that you’ve had a vast change in the balance of payments of the major oil producers, and if they take the brunt of the drop in emerging market investment, then this means that what happens to China is something of a footnote.
The thing about recent events is that they have improved the US/Europe balance of payments and also the US/Europe balance of payments with China while making increasing China’s trade surplus. This only makes sense if you think of China and the oil producers as separate rather than lumping them as “trade surplus nations” especially since they have radically conflicting interests. If the price of oil drops dramatically both the US/Europe and China are going to be very happy.
Also the restructuring of the SOE’s and improvements in internal infrastructure was the main reason that China started generating massive savings in 2000. Once you had good infrastructure and good companies, then the productivity of Chinese manufacturing increased dramatically leading to huge savings which should have been used to increase productivity throughout the world.
Talking about a “saving glut” leads to the totally absurd conclusion that the world would have been better off had the SOE’s and the banking system *not* reformed itself, and we stayed stuck in the 1990′s with a massive inefficient SOE and banking system sucking up savings. OK maybe it would have been better had the SOE’s been reformed and then people promptly consumed the profits, but *that* would have lead to a banking and industrial system that was completely undercapitalized leading to the same sort of mess that you see in the United States.
And for goodness sake, are you seriously trying to argue that the US could have found absolutely nothing to spend Chinese money on than on houses? What about better schools? Better health care? Small business loans?
What about spending it on nothing? Take the money, and then put it into paper bills and bury it. When people want to back you unbury it. That would have left the US better off than what happened.
Saying that the money that came from China was invested in the best way that it could have been invested is something that most Chinese simply cannot believe, and judging from what I see to be the popular mood, it’s something that very few Americans believe either.
Question: If the massive amount of Chinese savings invariably led to American spending, then why are Americans saving now? China hasn’t stopped saving. Interest rates in the US are at all time lows. So why are Americans saving massive amounts now?
To all,
Stupid, liquidity was not the cause of the crisis; It was merely the CONDITION that existed. the CAUSE of the crisis was the STUPID and DELIBERATE lending and borrowing. If regulators and lenders did their job as they did 25 years ago, there would be none or little of this crisis. Go find a Simple Logic 101 and read for yourself.
Here in the Silicon Valley, you would be equally stupefied if you had seen the sliminess of lenders and borrowers in 2005-2007.
I sort of agree with Twofish (and various other commenters): While there may be a “global savings glut”, and while it is true that massive amounts of Chinese savings were channelled to the US via the trade deficit, nobody forced the US to waste those assets by investing them in value-destroying activities. That decision was made/facilitated by American consumers, financial institutions and the regulator. The assets came cheap at real interest-rates around zero, and it sounds a bit unconvincing to blame China for its willingness to lend money for “free”.
Also, it’s a little too easy to blame the “global imbalances” for the current crisis: The US has been running large deficits for many years. The “international investment position” of the US amounted to -2.4 tr $ as of year-end 2007 (according to the Department of Commerce). Yet in every year up to 2007, the US has managed to earn more income on its foreign assets than foreigners have managed to earn on their US assets. In other words, the US has so far not been forced to transfer any net assets abroad to service the capital absorbed by the US economy. Quite the contrary, the US has run persistent deficits, yet still enjoyed net investment income inflows from abroad. Seen from that angle, the situation wasn’t unstable or unsustainable at all.
Though there might be a problem brewing: Apparently, the US has predominantly invested in foreign equity stakes, whereas foreigners preferred to buy US bonds. That’s the reason why the US managed to earn more on its foreign investments: Equity returns were higher than bond yields. Unfortunately, equities and corporate profits are currently taking a beating like never before. My guess is the US will no longer be a net income earner on its international investment position in 2009…
Can’t agree more with Twofish’s comments.
A simple analogy may be useful: Guns do not kill people, people kill people.
In a similar fashion, excess of liquidity does not cause economic crisis, bad uses of the liquidity cause economic crisis. And I suggest that “innovative” financial instruments accelerate/magnify the consequences.
The Chinese are traditionally a very thrifty race. If you have studied the history of China you will understand the reasons. When I was a kid I remember when I met someone in the street instead of wishing him “hello” I would say “Have you eaten”.
I was taught to save when I was very young by my mother and father. Looking back I have to thank them for teaching me how to save. I am teaching our children the same thing now. I always tell them buy what you need and not what you want.
I still believe saving is not a bad thing. I agree absolutely with Twofish that the Chinese saving doesn’t lead to the American spending. There is no logic in this equation.
The problem with people out there when things went sour in their country they invariably start pointing their fingers at China.
Why would Alan Greenspan need to lower interest rates to 1% if there was an Asian savings glut?
The savings glut was created by central bank printing presses. The Americans printed too much, and instead of letting their currencies rise a lot, the Asians printed even more. The system benefited both the U.S. government and Asian governments. America needed to fund wars and welfare, and Asian wanted growth through exports.
The investment bankers created all these new products because there wasn’t any profitable way to invest all this cash. They tried finding new ways, and it led to greed and human error. They are to blame for their actions, but they are like a violent drunk who was constantly offered free whiskey by the world’s central bankers. Anytime they looked about to sober up (pick any of the crises of the past 10 years), the central bankers handed out more free booze.
Of course the “glut” is bigger today, check out the printing presses running overtime. Yet still, the average Chinese and American worker has too little savings because they cannot afford retirement, home, college, etc.
Michael, Richard Duncan, in the “Dollar Crisis” spelled out years ago the “who, what, where and when” of the dollar recycling system. For Bernanke to suddenly come up with the “savings glut thesis” when only the counties have changed(china instead of Japan, etc..); NOT the recycling system itself is the “Non sequitur”.
Duncan was also very clear on Greenspan’s “conundrum”. If you’re going to continue the recycling game you better be ready to increase your debt at a rate that offsets the foreign purchase rate. If not, expect your LTR’s to collapse and your asset prices to explode.
But, of course, nobody listened…………….
Brian Shriver:
FDR tackled income inequality indirectly, by promoting development of the poor South and West, by supporting higher labor wages, etc. This time, we may need to resort to more redistributive progressive taxation.
Indeed. I propose a tightly linked corporate tax structure that immutably ties CEO (and other top exec pay and benes) to worker pay: Corporate taxes are minimized when CEO pay is no more than 8x average worker pay. As CEO pay and perks and benes increase beyond 8x average worker pay, then corporate taxes climb precipitously. There must also be an outsourcing clause: taxes are minimized when no more than 15% of any corporation’s work force is off-shored. If you increase beyond that 15%, then it is tax hit city.
If the CEO wants to lavish riches upon himself/herself, then that is fine and dandy. They simply need to correspondingly increase worker pay so the end differential is no more than 8x OR they do it without increasing pay for workers and eat the tax hit. Same goes with off-shoring workers.
I’d also like to see the off-shored worker’s pay be included in the average worker pay calculation IN US DOLLARS – to encourage higher pay for off-shored workers (no more slave labor/sweatshops) AND to eliminate any trickery of trying to use “equivalent US dollars” as a means of calculating average worker pay.
I picked 8x simply as a decent number. During the booming 60s, the average CEO didn’t make more than 6x the average worker income…and the economy boomed, the middle class grew and prospered, the country prospered. Since CEOs have seen fit to award themselves astronomical riches while cutting jobs, outsourcing, etc, the middle class has shrunk, income disparity has reached towards unstable and unsustainable bifurcation not seen since the Gilded Age. This is the stuff from which revolutions are made. It is past time to regrow the middle class, increase upward mobility, and prevent disastrous (and monstrous) income disparity.
Chinese people saving has absolutely nothing to do with my own spending habits. Their saving doesn’t MAKE me go out and buy bigger and bigger flat-screen TVs, a new car every 2-3 years, a bigger home every 3-5 years, etc. There is no linkage at all.
In fact, I would lay the bulk of the blame squarely at the Fed, Congress, Bush, Wall Street, and Bankers. The Fed (under Greenspan) promoted and inflated bubble after bubble. In one breath he would talk about the abysmal US savings rate but then talk up the need for people to CONSUME. Can’t do both properly. He would then constantly bemoan ANY increase in worker pay as being “inflationary” while ignoring and blessing monstrous CEO pay increases at the expense of workers. Congress takes huge blame for not doing their job and eliminating required financial regulations (with encouragement from Clinton and his neoliberal swine). Bush takes the blame for not even trying to enforce whatever regs remained. Wall Street and Bankers take the blame for obvious reasons: they actually believe that Wall Street IS the economy and that finance is a basis for an economy rather than actually making things and paying people good wages.
I don’t blame China or the Chinese for anything. They most assuredly do NOT force people to buy more house than they can afford. They did not inflate any bubbles with their saving ways. They did not force people to buy everything on loans and credit cards. What a crock.
Twofish:because Japan and many other big saver had to stop the export of saving as we can see now.
The export of saving came from the trade surpluss
The word “savings” appears to imply many things to many people. But, even with forward looking emotions of all the “rainy days” ahead; “saving” and its fractional return over time, combined with the legacy of savers over centuries upon centuries throughout history, is certainly no reason for the fall of an empire, and certainly not any one society’s economic contraction.
Perhaps the notion that buying/spending/investing in any one thing today has a greater risk of costing you 50% than rewarding you 5% is a more likely foundation of contracting markets
In reference to your archived article on Mexico circa 1982:
At the time Mexican President Jose Lopez Portillo, seeking to halt what he called the ”looting” of Mexico through the capital flight as Mexicans began withdrawing savings and converting them into dollars, nationalized the country’s private banks on September 1, 1982, less than a month after his finance minister had announced in a phone call to the US Federal Reserve Bank that Mexico would be unable to meet its upcoming external debt maturities.
This is an interesting example, since I seem to recall Bancomer, the nationalized bank, paying out +20% interest rates on “SAVINGS” accounts. If savings are really the root cause of contracting markets then this double negative must be a positive, or more likely a paradox.
Ultimately it’s the reward to investors (yes, “savers” too) that brought improvement to Mexico’s economy at that critical time. All things being equal in today’s economic turmoil, those +20% returns on investment would certainly bring flocks of new investors to the doors of others contracting markets as well.
China is a bigger vendor-financed operation than any dot-com company ever was (And how did those turn out?) Also: don’t forget the impact Bob Rubin had on the 1998 Asian fiasco when he convened earlier meetings with those nations. He essentailly conspired to fix the flows (and costs) of capital to the region. Some stability that provided!
Sir: the upshot to your many post is this, over capacity needs to be reduced and demand needs to be stimulated. Says law is dead. Today the markets rallied around the world because china will use its saving to expand its over capacity. What a shame
From Thomas:
“I sort of agree with Twofish (and various other commenters): While there may be a “global savings glut”, and while it is true that massive amounts of Chinese savings were channelled to the US via the trade deficit, nobody forced the US to waste those assets by investing them in value-destroying activities. That decision was made/facilitated by American consumers, financial institutions and the regulator. The assets came cheap at real interest-rates around zero, and it sounds a bit unconvincing to blame China for its willingness to lend money for “free”.”
From Praedor Atrebates:
“Chinese people saving has absolutely nothing to do with my own spending habits. Their saving doesn’t MAKE me go out and buy bigger and bigger flat-screen TVs, a new car every 2-3 years, a bigger home every 3-5 years, etc. There is no linkage at all.
In fact, I would lay the bulk of the blame squarely at the Fed, Congress, Bush, Wall Street, and Bankers. The Fed (under Greenspan) promoted and inflated bubble after bubble. …”
In very simple languages, you have just shredded the great theory of “saving glut.” It is just that simple!
Many economists and pundits tend to make simple things very complicated by using obscure terminologies and fuzzy logic. The problem is, once they promoted their theory for a while, they start to believe in it themselves.
There had been a tendency in the US in the last two decades to blame others for America’s various economic woes and problems. It has distracted the politicians and ordinary people from addressing the root cause of the problem. Witness the Japan-bashing and China-bashing over the last twenty years.
Surprisingly, this time, amid the worst financial and economic crisis in the last 60 years, I don’t find the usual “blame others” attitude among American people; I don’t find the strong protectionist sentiments that Michael claimed, at least compared with a few years ago. Instead, I find a sense of somberness and self-reflection. I actually find this very encouraging since it is the first step in confronting and addressing the real problem head-on.
This thread has been the best since I started to read this blog-I really enjoy reading the comments.
Twofish: “Talking about a “saving glut” leads to the totally absurd conclusion that the world would have been better off had the SOE’s and the banking system *not* reformed itself, and we stayed stuck in the 1990’s …”
It does?
“And for goodness sake, are you seriously trying to argue that the US could have found absolutely nothing to spend Chinese money on than on houses?”
No where does he make this silly argument.
“So why are Americans saving massive amounts now?” You know perfectly well why.
With all due respect, I think you are slipping into the slip-shod habit of willfully mis-reading what other people write; then refuting your own caricature.
Waiting Out,
IT seems that you dont understand much about how banking works.Having been awashed with large quantity of liquidity,banks must increasingly lend much of them to just stay in the business.
To quote Walter Bagehot’s words in Lombard Street,”If you hold (as in Lombard Street some persons do) millions of other people’s money at interest, arithmetic teaches that you will
soon be ruined if you make nothing of it even if the interest you pay is not high.”
So bankers has no other choice over themselves but must piling up more assets during this kind of liquidity expansion period.
I warned that it would be considered highly controversial, and clearly I was right. The idea of the global savings glut gets so wrapped up in nationalism and blame that it is very difficult to discuss it analytically.
Fatbrick, There definitely is a tendency in the US to want to blame foreigners for problems, but I hope this isn’t the only genesis of my thinking. It would be too easy for me to point out that actually quite a lot of countries exhibit this same tendency, and none more so than China – a country notorious for blaming foreigners. I will refrain from suggesting that the only reason you cannot understand the savings glut hypothesis is because as a Chinese you have been trained to assume that China can never be part of the problem. By the way, my club has never programmed heavy metal music – not that we oppose it but that for me the most interesting music in China hasn’t been heavy metal. Come by in ten days and we will have a two-day festival of the best avant garde and experimental performers and composers from around China. Hope to see you.
Joe, yes there must be a combination of excess savings and binge consumption. One always requires the other.
MXQ, of course you are right, but as some of the subsequent comments indicate, with their analogies between what is right for a man and what is right for a country, this seems to be a very tough idea around which to wrap our minds.
Brian, one piece of good news is that in the past the collapse of every liquidity period – which almost always saw increased wealth inequality – was followed by a period of income redistribution. I expect we will see this happen once again..
Thomas, the contraction of capital flows to developing countries will decrease, not increase, net demand. Deficits must be financed, and a contraction of financing must result in a contraction of the deficits. As to your second point, corporate savings are indeed large, and a reduction in profitability would reduce the nominal size of savings, but whether the savings rate declines depends also on the split between savings and spending, and corporate spending will also go down.
Tyaresun, I agree partially with you but I guess I am more impressed than you are by the fact that historically liquidity expansions always result in weakening credit standards, bad lending, and if it persists, real estate bubbles. Look at Japan in the 1980s (with a very different, non- “anglo-saxon” financial system, far greater regulation, and almost no consumer binge lending) or China (ditto) in the past few years, where monetary growth led, yet again, to foolish lending to create huge amounts of excess capacity and vastly overbuilt cities.
Glenn, yes, discussing the global balance of payments system is a guaranteed way to infuriate quite a lot of people.
WaitingOut, I think your thoughts are very comforting but not highly informed by historical precedence. As Hyman Minsky argues, and as finance history suggests, the inverse link we easily assume between regulatory strictness and financial stability is a little hard to find. It seems to be more a matter of faith, especially among lawyers, than something easy to demonstrate. I know this is a highly contrarian point, but I have been writing about the consequences of the end of the liquidity boom since my 1995 Foreign Affairs article and nearly all of this, including the very standard mistaken responses to the crisis, was easily predictable.
Saving, Parachute, and Mo Zhou, please see my response to MXQ. As attractive as it may seem to consider a country’s economy as if it were a single household or a single person, that leads to a huge amount of confused thinking and bad analogies.
Isaac, I agree with most of what you say although I think the balance of payments relationships implied by the concept of the savings glut is actually quite illuminating in understanding the crisis and its resolution.
Seatrus, many economists in China half-jokingly refer to the reforms of the past 30 years as “crisis-driven” reforms. In fact a very “Austrian” way of looking at crises is to consider them the necessary adjustments after long distortions. I think that China (and the US and the rest of the world) may very well emerge from the crisis with a new set of institutions and reforms that set the basis of long-term growth. What matters is the policy response. If one consequence of the crisis in China (and the US, for that matter) is a reversal of the sharp increase in income inequality, that is almost unreservedly a good thing.
Mannfm11, I am not sure I or anyone else has missed Rueff’s point. In fact a very fundamental requirement of the global balance of payments is that for all countries, and not just countries with reserve currencies, the money never leaves the country (except for a few negligible, and arguable, exceptions). That is why the balance of payments always balances.
PB, I would argue that the savings glut is at the root of the imbalance, along with loose US monetary policies. For me it isn’t meaningful to assign primary cause. As everyone is forever forgetting, in this case it really does take two to tango.
Michele, I read James’ piece a few weeks ago, and found parts of it very insightful, but he makes the mistake very common of analysts outside China of grossly overestimating China’s ability to resolve the global problem.
Benign, there was a US household debt explosion in the mid 1980s but it receded after the Plaza accords (so much for the idea that US debt consumption is not affected by external liquidity), but it really began taking off again in 1998-99 which is, not coincidentally I think, just as Asian policymakers were implementing trade policies that were aimed at responding to the crisis of 1997.
Rob, I agree, which is why I try never to suggest that one thing or another “caused” the crisis. Every distortion in the balance of payments requires another equal and opposite distortion.
Bob, yes. I think policies aimed at boosting production and constraining consumption are what led to the savings glut.
Twofish, talking about the global balance of payments does not “lump” China in with Saudi Arabia. Most developing countries who are seeing finance dry up are not the Saudi Arabias of the world so much as the Mexicos, Brazils, Hungarys, Indonesias and Thailands of the world. In global trade they are competitors, suppliers, and clients of China, and what affects them cannot help but affect China.
As for your second point, it is hard for me to argue with what seems like a non sequiter. It is not clear to me why the existence of a savings glut is a necessary consequence of reform in the SOE and banking sector. It is perfectly possible to reform an inefficient capital allocation mechanism without putting into place demand constraining policies that force a huge investment of savings ion foreign assets. In fact I would have an easier time arguing that the reform process would have been more efficient without those policies.
As for you question, “are you seriously trying to argue that the US could have found absolutely nothing to spend Chinese money on than on houses,” it would be a very strange argument to make and one, once again, totally unrelated to the savings glut hypothesis. As I mentioned already too many times, this isn’t analysis; this is merely a question of trying to fix full blame. In my opinion this exercise is totally sterile.
Finally, your question “If the massive amount of Chinese savings invariably led to American spending, then why are Americans saving now?” can only make sense if you are assuming a two-county model of the world. It is perfectly possible for US savings to rise and for Chinese savings to rise too. All that it would require, as I pointed out in the last two posts, is that other countries see a more rapid contraction in exports than imports. Is this happening? Look around.
Thomas, I don’t disagree, but once again this seems to me more about trying to find out who the “real” bad guy is than trying to understand the roots of the imbalance and the consequences of the crisis. Once again, I don’t really care whose fault it is and who behaved the worst. There is more than enough blame to go around several times.
Dr. Loo, yes, but I am always a little uncomfortable with those arguments. Up until the early 1990s all the Asian Tigers had excess savings and, consequently, large trade surpluses, but then they all suddenly went into excess consumption mode and ran such large trade deficits that they eventually ran huge currency mismatches that led to the crisis of 1997. After the crisis all the Asian Tigers suddenly became high savers again. Unless their cultures went through a very rapid transformation around 1991 and then an equally rapid reversal in 1997, it seems to me easier to posit the impact of liquidity flows as a major determinant of the national savings rate. Culture matters to the individual, but policies and institutions, which are manipulable, matter to the economy.
Matt, as has been widely commented, the Fed controls short term rates but the market control long-term rates. For the past decade the Fed has often complained that it was having real trouble raising long-term rates, and one reason was the massive purchase of long-dated Treasuries by foreign central banks.
Funny how news works. I put a small bet on the DAX hoping that the NCP meetings would give a little good news to a stock market in dire straights, I had not foresee such hysteria.
It is very common that the NCP says It will increase spending, It does so every year.
I have found no description or plan of, what the money is going to be spend on, so maybe we will all have to wait just a little bit to be sure, this is the real thing.
Playing the blame game is funny and sure we can all agree that the finacial sector guys, where not as good as their 500.000 dollar MBA or Ivy league school papers said they where.
The thing is that China needs growth in domestic consumption and she needs it soon.
Not to help the Americans or Europeans or the untalented people in the financial sector, but because it makes China extremly dependent on exports and on the economic wellfare of the US and Europa.
TWOFISH:
Also SOE profits will likely go down and this will reduce savings, but this is precisely why savings are a good things. If you don’t have savings then when you have an economic shock, you must fire workers, you have no choice and this makes things worse as demand dries up.
Hmm Let us all hope that these savings will not be used in the same way as the bank loans of the early 1990ies did, when the debt-equity ratio freaked out. SOE (anywhere) are known not to handle soft budget constraints very well, and seeing the increase in Chinese bank loans in 2009 I would say savings is only a good thing, if you have the right system for spending it.
That what the NCP sould be talking about now, how to make sure the money is spent in a profitable way.
Maybe I am just being pessimistic, but I don´t see how SOE can be profitable with low domestic consumption, lower levels of FDI and exports contracting in the years to come.
Michael,
you responded:
“this seems to me more about trying to find out who the “real” bad guy is than trying to understand the roots of the imbalance and the consequences of the crisis. Once again, I don’t really care whose fault it is and who behaved the worst.”
This is where I disagree:
Let’s leave the “blame game” aside. Your point (as I understand it) is: There is a causal relationship between Chinese excess savings and the current financial crisis.
My response is: There is no such causal relationship. The “excess savings” do exist. But if the US had not created the right climate for the subprime disaster to occur, then the US (or Europe, or China itself) could have borrowed all these excess savings cheaply to do all sorts of things. It could even have been used for government deficit spending (ideally not “pork barrel”, but projects chosen by their social merit). It would not have been terribly difficult to service this foreign debt: In spite of running large current account deficits for decades, the US still managed to be a “net investment income earner” on its foreign investment position in 2007 (and every year until then) according to official statistics. So it was a net debtor who effectively never had to pay interest on its net debt. And if the savings glut is a real glut, interest-rates go down quite automatically. As long as the Fed makes sure there is some inflation, equilibrium real-interest rates could well have become negative. As long as China is willing to provide the money at negative interest-rates, that’s great for the US. And if real-interest becomes too negative, China might well have decided to put its money to better use (as in: spend more domestically).
So: Once you make sure that subprime doesn’t occur (by using proper policy and regulation), the “savings glut” no longer has catastrophic global consequences. It is not necessarily something that will lead to a global meltdown. Cheap money is a temptation. But the world can refuse to be tempted. And knowing the faults and weaknesses of consumers and financial institutions, governments and regulators need to make sure that temptation is not too easy.
I don’t think this is “laying blame”. It is an economic analysis, that just happens to come to the conclusion that “letting subprime happen” caused the current disaster, whereas the “imbalances” didn’t. The imbalances maybe made it easier for subprime to come about, but they did not inevitably bring it into existence.
Michael: he idea of the global savings glut gets so wrapped up in nationalism and blame that it is very difficult to discuss it analytically.
There are about a hundred things wrong with the Chinese economy and a hundred things right with the US economy. The Chinese economy misallocates savings toward infrastructure away from small and medium entreprises and is not very innovative. The United States has a much better and more flexible legal and political system than China. It is much better at anti-trust, food safety, and bankruptcy, and has a immigrant population that lets it do things that China simply cannot do.
So trying to dismiss my arguments because of “nationalism” just doesn’t work. There are hundreds of things wrong with the Chinese economy. It’s high savings and investment rate is *NOT* one of them. There are hundreds of things right with the US economy. Financial regulation and efficient capital allocation is *NOT* one of them.
If you want to argue that China is being unhelpful in Darfur, fine I agree. If you want to argue that China was being unhelpful by saving large amounts of money and buying Treasuries, then I don’t.
So I don’t see the point of even bringing in nationalism into this discussion. The only possible context of nationalism is that for a decade the US was trying to promote an ideology of free markets and free societies, and so criticism of that ideology gets mixed in with criticism of the United States. However, there are enough people within the United States that have issues with the democracy promotion strategies of the US and conversely enough neo-liberals in China, that even this isn’t an issue. Personally, I’m not blaming the United States for the global mess. I’m blaming the Bush Administration.
Michael: Thomas, I don’t disagree, but once again this seems to me more about trying to find out who the “real” bad guy is than trying to understand the roots of the imbalance and the consequences of the crisis.
I do have a problem with terminology. Even using the terms “global savings glut”, “imbalance” and “financial repression” makes it difficult to discuss things analytically, because one is already using terminology that implies that something is good or bad. I don’t think that the Chinese high savings rate and trade surplus was a bad thing, but if you make me use the terms “imbalance” and “glut” that ends the argument before it starts. If you ask the question “how do we fix global imbalances?” then I’ve already lost the argument.
Once you start using the term “imbalance” you’ve already made some assumptions about what the problem is. I don’t think that “imbalance” was the problem. The problem was lack of regulation in the West, and Thomas explains my position on the topic.
Michael: It is not clear to me why the existence of a savings glut is a necessary consequence of reform in the SOE and banking sector.
Because once you reform SOE’s and banking, you generate a huge amount of wealth, which has to be managed somehow.
Michael: It is perfectly possible to reform an inefficient capital allocation mechanism without putting into place demand constraining policies that force a huge investment of savings ion foreign assets.
Once you make capital allocation more efficient, you generate massive amounts of new wealth. You keep on talking about the dangers of industrial overcapacity, but you run into the same issues with financial overcapacity. If you allocate capital more efficiently, you generate new wealth that has to be managed.
At that point you run into the problem of what to do with that new wealth. In the case of China, if they money hadn’t gone into US Treasuries, it would have resulted in an even larger consumption/investment boom in China and that would have resulted in a worse situation than what we have today (at least for China). If you have to have a financial crisis somewhere, it’s a good thing to have it in the United States. The US financial system is *far* *far* more able to deal with a financial crisis than the Chinese financial system is.
Michael: In fact I would have an easier time arguing that the reform process would have been more efficient without those policies.
And increased efficiency leads to increased wealth and more savings. If you think that there is a “glut” then efficiency makes things worse.
Michael: As for you question, “are you seriously trying to argue that the US could have found absolutely nothing to spend Chinese money on than on houses,” it would be a very strange argument to make and one, once again, totally unrelated to the savings glut hypothesis.
It is completely relevant. If you can argue that the United States could have invested foreign savings in ways that are much more productive than what it actually did, then there is no “glut” at all. China moves massive amounts of capital into the United States were it is invested in ways that benefit the world economy. Everyone is happy. No “glut” or “imbalance” at all.
In order to argue that there is a “glut” you have to argue that the savings were invested in the maximally productive way, and that the only thing that could be done is to reduce savings. If you can’t make that argument, then the “glut” hypothesis falls apart because the problem becomes how the savings were invested rather than that they existed.
Michael: It is perfectly possible for US savings to rise and for Chinese savings to rise too.
At which point the savings glut hypothesis falls apart. If it is possible that US and Chinese savings both rise, then one could hardly cause the other.
Micheal: All that it would require, as I pointed out in the last two posts, is that other countries see a more rapid contraction in exports than imports. Is this happening? Look around.
Or that US and Chinese domestic investment increases, at which point you run into problems only if you can argue that there is nothing more than you can spend money on, which gets to my question on houses.
Anders: Hmm Let us all hope that these savings will not be used in the same way as the bank loans of the early 1990ies did, when the debt-equity ratio freaked out.
I don’t think that what the Chinese government did in the early 1990′s was such a bad thing. It spend savings to maintain employment and prevent a crash of the system. That’s a perfectly reasonable thing to do. The specific way that the Chinese government went about it had major problems, but the notion of spending to prevent an employment crash is sound.
Anders: SOE (anywhere) are known not to handle soft budget constraints very well, and seeing the increase in Chinese bank loans in 2009 I would say savings is only a good thing, if you have the right system for spending it.
The problem that you run into is that you have major issues when you mix soft-budgets and hard-budgets. There is a legitimate state interest in maintaining employment, but if you structure that spending in the wrong way, it becomes impossible to separate out market signals from government intervention and bad things happen.
Qingdao: With all due respect, I think you are slipping into the slip-shod habit of willfully mis-reading what other people write; then refuting your own caricature.
I do often misread what other people write, but I never do so willfully. What I’m trying to argue is that even the concept of a “savings glut” leads you to all sorts of absurdities, if you can explain why the notion of “savings glut” doesn’t lead to absurd situation and conclusions, go ahead. I might be wrong.
————–
There are a lot of nationalistic conflicts between the United States and China, but the issue of “what went wrong” or even “who to blame” isn’t one of them. I will note that most of the people that are arguing against you don’t seem to be Chinese, and the one person I can see that is agreeing with you is.
There aren’t many Americans that I know of that would blame China or who would argue that it was a bad thing that China saved as much as it did or who would defend US economic policies of the 2000′s. And my sense is that most Americans (include the current political leadership) strongly agree with the criticisms of the United States financial system that have been presented in the Chinese media.
You can change the tone of the discussion radicially if instead of saying “Americans are total idiots at financial regulation” you say “the Bush administration were total idiots at financial regulation.” So actually the issue of “who to blame” is important since you can change the tone of the discussion considerably.
In this particular situation, Bush makes a convenient scapegoat, since nothing bad happens if you blame everything on him, and one very good thing that you can do with the US political system that you can’t do with the Chinese one is to elect a new President and then blame everything on the old one, so that public anger gets directed at people that are out of power rather than at the system itself.
Also the fact that most Americans and Chinese seem to agree on “who to blame” and “what went wrong” is why I think you are vastly overestimating the likelihood of trade friction. People in the US are blaming the bankers and the regulators, no one I can see is blaming foreigners in general or Chinese specifically for the mess.
*Michael:* Unless their cultures went through a very rapid transformation around 1991 and then an equally rapid reversal in 1997, it seems to me easier to posit the impact of liquidity flows as a major determinant of the national savings rate. Culture matters to the individual, but policies and institutions, which are manipulable, matter to the economy.
For that matter the United States has within six months discovered the benefits of saving. A year ago, I was getting all these letters in the mail asking me to sign up for low interest credit cards. Today, all the signs are asking me giving me bonuses for starting a savings account.
Economics changes culture, more than culture changes economics. I suspect that for the next decade, people will want to stay out of equities.
The reason that I “blame George W. Bush” is that I happen to think that the notion that the US financial system is more sophisticated and advanced than China’s financial system is true. If China had kept the massive savings in its domestic economy, it would have created a massive asset boom that would have burst and eventually destroyed the domestic economy. The Chinese financial system was just not that good in 2003.
Whereas, I believe that the US political and financial system *could* have invested the inflow of cash more effectively than it did, but because of bad political decision making, it didn’t.
If you want to see what could have happened, look at the dot-com bubble. You had massive amounts of capital invested in the internet creating a huge market bubble that popped. However, even after the bubble popped, you tended up with something that ends up generating global wealth.
So if the US had put this money in renewable energy, infrastructure construction, health care, space exploration, or education, there might have still been a bubble but when the bubble popped there is still enough real wealth generated to cushion the blow. As it was, the cash that flowed into the United States went into houses, and after the bubble popped, you have nothing to show for it except rows and rows of rapidly decayed residential property.
The reason that people are angry is that we have all been told for the last decade that what we need are more markets and less government regulation, that the US has the best financial system in the world, and that China should copy it. The interesting thing is that I suspect that Americans are now more angry about this is that more Americans believed this than Chinese did.
The low savings rates in the United States were largely due to the fact that most Americans believed that they could make 10% per year in their 401(k) in the stock market and so they didn’t have to save much. This belief was so strong that in 2003-2004, the US government was seriously talking about privatize the social security system. It’s now obvious that this was a lie, and that people are now looking at 3-5% returns after a 50% loss in their retirement savings, and I suspect that going forward US savings rates are going to start looking like Chinese savings rates.
At this point if you get up on a podium and say “stop saving” “saving is bad” you are going get eggs thrown at you. So the game now is not to stop convincing people to save, but making sure that this savings generates maximum economic growth, and that’s the challenge that faces both the US and Chinese financial systems.
One the great strengths of both the US and China is how quickly the entire country can change when there is a crisis, and the US is a vastly different nation than it was a year ago.
That is what I was saying
Households have savings, not economies. Here we have reserve glut. I really don’t see why should we call reserve(parachute) glut a savings glut. It leads to confusion and then we have all sort of flames coming out from endless discussions. Someone coined a bad term.
One other problem is that if you argue that the underlying problem was liquidity and that if you have massive liquidity then you will run into problems regardless of what you do, that still doesn’t get the Bush administration off the hook.
You can reduce liquidity by increasing short term interest rates and massively raising taxes and creating a budget surplus.
“The low savings rates in the United States were largely due to the fact that most Americans believed that they could make 10% per year in their 401(k) in the stock market and so they didn’t have to save much.”
2fish, that’s putting the cart b4 the horse. The Greenspan put plus Reagan’s(who was a great geo-political president but still ended up doing long term economic damage 2 the US) coup against organized labor is what drove the masses to become speculators; first equities and then real estate.
It’s the forcing of the low return on savings that caused the citizens carry. It will be interesting in a few years to see if the Anglo world repeats the Japanese(Mrs Watanabe) foray into foreign currency carry trading(likely)
Why did Japan’s $1 TR foreign reserve holdings not cause financial instability but China’s $1.8 Tr has? Is it because Japan holds mostly Treasuries while China bought other financial assets?