2006 March 13 Monday
Stephen Roach: China Saving Half Of GDP

One reason why the US trade deficit is 5.8% of GDP:

The numbers leave little doubt as to the extraordinary contrast between the two economies. Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the US saved only 13% of its national income, or $1.6 trillion. That's right, the US, whose economy is six times the size of China's, can't manage to save twice as much money.

And that's just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a US rate that dipped into negative territory last year (-0.4% of after-tax household income).

These are extreme readings by any standard. The US hasn't pushed its personal saving rate this far into negative territory since 1933, in the depths of the Depression. And the Chinese rate is higher than it has been at any point in the past 28 years, since its modern reforms began. Similar extremes show up in the consumption shares of the two economies — the mirror image of trends in personal saving rates. US consumption has held at a record 71% of GDP since early 2002, while Chinese consumption appears to have slipped to a record low of about 50% of GDP in 2005.

China's lopsided economy and their manipulation of their currency (the awkwardly named renminbi) are setting the US up for a severe fall should the Chinese go into a depression. Chinese money is keeping US interest rates unnaturally low and is feeding the US housing boom. All that could change very rapidly should the Chinese economy go unstable.

The focus of many economics and free marketeers on tariff trade barriers and their complaints when Bush restricted steel imports strike me as a case of fighting the last war. That the US has incredibly low barriers to foreign goods is demonstrated by America's ridiculously high trade deficit. This is a dangerous situation.

Some say the Chinese have a huge trade surplus because they are rapidly developing. Then by that argument the US should have run a huge trade surplus in the 19th century. Did it? I don't think so. My impression is we were net receivers of foreign investment and that while we had high trade barriers we didn't run a large trade surplus.

Share |      By Randall Parker at 2006 March 13 08:54 PM  Economics Trade


Comments
Randall Parker said at March 14, 2006 5:59 AM:

Guys,

If your comments do not immediately show up please do NOT repost. I installed a new version of MovableType and it is deferring all comments for moderation. I can not figure out how to make that more selective (there are obvious settings for it that have no effect) and I've posted to support to get answers. So today it will be problematic. Sorry about that.

blookyzim said at March 14, 2006 4:08 PM:

I don't know what the trade statistics were during the 19th Century, but if the US was a large net capital importer, then it ran a trade deficit. The trade deficit = the investment surplus. That's not an ideological claim; they are, literally, the same thing. The fact that foreigners want to invest in our country demonstrates our economic strength, not weakness.

It is true that if China's economy were to collapse, it wouldn't do us any good. However, the reverse is also true: a US economic collapse would qutie definitely harm China. And our economy is significantly more flexible and resilient than the Chinese economy. Unless we did a bunch of stupid things, the US would recover far more rapidly from a mutual economic downturn.

Grubbly said at March 14, 2006 6:31 PM:

I think that humanity will be better off in the long run if the United States and the West influence humanity more than China does. Even if they grew a higher aggregate gdp, and thus gained the power to possibly gain greater influence over humanity, they'd still have a low per capita gdp, and thus probably still be a cruder, ruder people. If space colonization doesn't happen for a hundred years, aren't the Chinese set to inherit space?

Randall Parker said at March 15, 2006 6:50 PM:

halol,

You mean Fox News should be running stories about how the US economy has serious problems? I do not think they want to go that negative while a Republican sits in the White House.

Gary Glaucon said at March 18, 2006 9:54 AM:

Free trade agreements should be a page long at most, not thousands. These so called free traders have placed benefits in the technical language for friends and family. Right now China is saving our ass by buying debt and shipping cheap products back as our govenment runs up debt to keep buying votes.

Bush and most Republicans are big government socialist. Who do you know that DOESN'T receive a government check?

Look at their actions!


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