Don’t Count On U. S. Consumption
This morning a Christian Science Monitor editorial sounds precisely the right note on turning the current global economic downturn around:
Unless export-heavy countries such as China, Japan, and Germany shift their policies away from favoring such producers and limiting consumption, the danger remains of perpetuating the root cause of the sharpest decline in the global economy since World War II.
An excess of US dollars earned from these countries’ exports was a big contributor to the global financial crisis. Those dollars flooded the US, allowing credit to flow to Americans who bought homes they could ill afford.
An agreement to prevent a repeat of this imbalance would be the best outcome at the April summit of G-20 nations, which represent 85 percent of the world economy. The last G-20 summit in November warned of “unsustainable global macroeconomic outcomes” behind the current crisis. Clearly, artificially pumping up exports is now seen as having left the world askew.
You can point to subprime mortgages, credit default swaps, or greed for the financial crisis and the economic downturn that followed it but all of these were consequences rather than causes. And unless we deal with the real causes we won’t be dealing with the real problem.
We cannot solve the world’s economic problems either by buying less or buying more. But China, Japan, and Germany may well take major steps towards solving the problems by cultivating their own domestic markets as engines of economic growth.
US debt was a consequence of Asian saving, but I think you take too many people off the hook when you imply it was a natural consequence.
The world would look very different if Asians had saved, and we had saved too.
Perhaps rates would be low, and real returns would be low (an oversupply of investment capital bidding down rates in safe and staid investments) but we quite probably would have avoided the bubbles.
There are some old rules that we brushed aside as no longer applicable: “your age in bonds”, “keep six months income in an emergency fund”, “buy a house costing 2.5 times household income.”
It’s kind of interesting. I read Bill Gross on investing, a 1998 book, just last year. He got the future totally wrong from a prediction standpoint, but in a way I think he accurately described the world that would have been without the credit bubbles. It would have been his slow-moving Butler Creek.
When people respond to the incentives that are before them, that’s a natural consequence whether it’s us or the Chinese. For us to have the same incentives as the Chinese, we’d have to eliminate social insurance, change our healthcare system, funnel all foreign currency through a government-owned bank, and peg our currency to some nonexistent supereconomy, among other impossible and undesireable actions.
Check the timing.
This isn’t to say that I don’t place blame. I do. I blame political leadership both here and in China who created the incentives. I understand that political leaders have incentives of their own but my sympathy with the desire for unlimited power and riches is limited.
I think the thing people missed was the social feedback, and the culture of debt.
People bought homes at 4x income and leased their cars at the same time because that’s what their neighbors did.
It wasn’t rational. There were no incentives that made it rational. No leader made it safe or prudent. They did it anyway, because at that moment in time “debt was good.”
It possibly ties into the idea that debit-crisis depressions can’t happen more than once in a lifetime, because once bitten, those folks don’t do it again.
That’s a good point, and one that is frequently hinted at but never expressed directly. To put it simply, if every asshole around you is living unsustainably on debt, then you are going to be under direct pressure to do the same to “keep up the joneses”. This was helped by the fact that the system was flooding the US with cheap money, and the fact that interest rates were kept low for a long time by Greenspan.
Well, Japan has been running a trade deficit for the past 2-3 months, so that may be changing. It’s hard to do in China’s case, since 700 million of their population is still living on $600 (most of which goes into living expenses and savings), and most of the rest are low-income by American standards.
Now, Germany, yes.