2009 October 02 Friday
Economic Recovery Requires Fixing Global Imbalances?

Satyajit Das argues that we can't fix the economy without fixing the global imbalances in savings and consumption. Looks to me that policymakers have decided to inflate a new bubble rather than address the deeper causes.

A cursory look at the respective economies highlights the magnitude of the task. Consumption's contribution to U.S. GDP is 71%, while in China, it is 37%. Given that the GDP of China is around $4 trillion to $5 trillion, vs. $15 trillion for the United States, and average income in China is around 10% to 15% of U.S. earnings, the difficulty of using Chinese consumption to drive the global economy becomes apparent.

Additionally, over the last 25 years, Chinese consumption has declined from around 50% to current levels of 37%. During that same period, Chinese savings have risen and exports have been the engine for growth. Given that a significant portion of exports is driven ultimately by American buyer, lower U.S. growth and declining consumption creates significant challenges for China.

Dealing with these global imbalances has not been a high priority in the various summits, symposiums and talk-fests that global leaders have shuttled to and from. The focus has been ‘NATO' – no action talk only. Half-hearted and unworkable proposals, such as the use of the synthetic Special Drawing Rights as reserve currency, have emerged.

Think about that. In China only 37% of GDP is consumed. The rest is reinvested. The US can not balance its own trade as long as East Asian countries refuse to consume as much as they produce. The US government's budget deficit is in part a reaction to the trade imbalanced caused by Asian savings. The US government is trying to use deficit spending to substitute for the demand loss caused by the large US trade deficit. That trade deficit is caused by external factors - the determination of some other countries to run huge trade surpluses.

The irony is that China's accumulation of dollars doesn't buy them greater security. They can't use those dollars without causing their value to plunge.

Reliance on Chinese foreign currency reserves is probably misplaced. Chinese reserves, a large proportion denominated in dollars, may have limited value. They cannot be effectively liquidated or mobilized without massive losses. Increasingly strident Chinese rhetoric about the safety of their dollar assets reflects increasing panic.

In reality, China is trying desperately to switch its reserves into real assets – commodity or resource producers where foreign countries will allow. In the meantime, China continues to purchase more dollars and U.S. Treasury bond to preserve the value of existing holdings in a surreal logic. On the other side, the U.S. continues to seek to preserve the status of the dollar as the sole reserve currency in order to enable itself to finance itself. The intractable nature of this problem is evident in the frequently contradictory statements from various Chinese spokesmen regarding the official position on the dollar.

Some of China's commodity buys might make sense. If they focus their buying on commodities that are going to become more scarce in the future (e.g. oil) they might even make a profit.

Das says the problems highlighted by the Global Financial Crisis (GFC) can't be solved as long as the huge imbalances in consumption and savings and investment remain. I agree.

No sustainable global recovery is likely without addressing the fundamental global imbalances that lie at the heart of the GFC.

I do not see Timothy Geithner, Ben Bernanke, and other top US policymakers working this problem in earnest.

Share |      By Randall Parker at 2009 October 02 11:32 PM  Economics Trade

Jim said at October 2, 2009 11:50 PM:

it's really a pretty easy imbalance to fix: Stop the Asians from buying us bonds. US dollar goes into the toilet and American goods are competitive again. US goverment goes belly up. It's a win win in my book.

A.Prole said at October 3, 2009 1:47 AM:

Basically, it's not so much a great big poker game - a game of bluff and double bluff - but more like a great big chess game in which calculation, second guessing and strategy are all important.
Anyway, the current 'liberal free-trade' paradigm at root of all of this is pure bullshit - but the 'clever' people can't see it.

Eric Johnson said at October 3, 2009 12:34 PM:

Well, what is at the root? Why do they save so much in the first place? Is it explainable solely by a higher biological (and/or cultural) future-orientation, plus a worse demographic situation than the US faces? And since things change so fast (China will be a lot richer in just five years, and way richer in ten), will greater incomes in China dampen the percent savings?

Randall Parker said at October 3, 2009 2:28 PM:

Eric Johnson,

The Chinese renminbi currency is not fully convertible. Chinese exporters must exchange dollars and other currencies earned from exports into renminbi at a fixed exchange rate. The Chinese government (thru banks) then buys US bonds. This cuts back on the ability of exports to generate foreign currencies to buy foreign goods.

Truth said at October 3, 2009 7:00 PM:

This idea of Chinese "savings" is a misunderstanding. Westerners keep thinking that individual Chinese are sitting around saving all of their money like good little squirrels. This is not the case.

Take a good look at what China does. China is, basically, an economic system that allows Western corporations to labor arbitrage between different countries. So, China offers cheap labor and few regulations. Corporations invest billions building factories there. The factories then export products all over the world, but, primarily to the United States. Corporations and the Chinese government split the proceeds that Chinese factories get from exports. The Chinese government then pays its own workers out of its end, usually in some worthless local scrip.

Chinese savings is really the government's own earnings. The Chinese don't have better future time orientation. They simply do not have much of a domestic economy that does more than sustain its population.

Eric Johnson said at October 4, 2009 11:27 AM:

So the PRC-gov elects to run an ample surplus, and save that surplus largely in US bonds. But why save? So they can draw upon it for social spending when the demographic aging crunch hits?

(I myself did indeed have the mentioned misconception that Chinese individuals were doing the saving.)

Reading Randall's comment, I wiki'd renminbi and saw that the PRC-gov fixes the foreign exchange rates at about half the estimated PPP value of the currency. (I've heard about this for years but wasn't sure exactly what it was.) Why do this? Can boosting their exports be worth the loss of availability of foreign goods to Chinese consumers? Basically, in effect, they are making exports from China legal but imports into China partly illegal, which would seem to worsen the Chinese consumer's concrete wealth. I realize of course that they may be interested in power just as much as prosperity, or more.

Randall Parker said at October 4, 2009 11:44 AM:


The Chinese leaders are trying to accelerate their rate of economic growth by diverting more productive output toward capital accumulation. They are also trying to eliminate foreign competitors in some industries (and succeeding). They figure living standards will rise fast anyway since each year's capital accmulation boosts total output (including output for consumption) the following year and later years.

They've got a smart population. So they've got people who can operate, maintain, and improve all the capital equipment. Even today their total capital base is smaller than ours. Though in some categories (e.g. steel plant capacity) they have already surpassed the United States in total capital, albeit not per capita.

Free trade economists do not want to believe it but mercantilism can work in some circumstances.

Rohan Swee said at October 4, 2009 2:20 PM:

Free trade economists do not want to believe it but mercantilism can work in some circumstances.

Indeed. Earlier this week I was listening to some NPR program on the problem of trade imbalances, wherein some Economist editor (probably the one who penned last week's witless leader on tyre tariffs) stated that "history shows us" that no nation ever got prosperous using protectionist policies - as patently, breathtakingly false a statement as ever wafted over the air-waves.

One would think that the no-shit-sherlock reality of "it's the trade deficit and consequent joblessness, stupid" would have sunk in to and humbled even the most ardent little true-believin' apparatchiks by now, but no. Instead the public is treated to the Bernankes and the Geithners (and the Krugmans and the Reichs and the...) still wittering on about economic epicycles and deferents, occassionally making a nod to the problem of trade imbalances only for the purpose of anathematizing "protectionism": no concrete, real-world method of dealing with others' mercantilism allowed!

Their "solution"? Any day now, China is going to start increasing its consumption and import all kinds of crap from us! (Instead of just importing a few things from industries they haven't managed - yet - to transfer to China, as they do now.) It's inevitable! China's actual response to the problem of trade imbalances? Ramp up its already excess-capacity export platform, and expand the mercantilist policies (subsidies, rebates, etc.), thus *increasing* our deficit with them.

Because Adam Smith, Baby Jesus, and Walmart want it that way, I guess.

averros said at October 4, 2009 11:19 PM:

Mercantilism works for China?


The stupid Chinese "leaders" accumulated a pile of dollars which they cannot shift. The Fed keeps printing more dollars, at astonishing rate.

So... the Chinese send real goods to US and get freshly minted Fed IOUs in return. One day this scam will blow up and the Chinese will end up with a bunch of worthless paper, having worked hard for years and years.

If they were smarter they'd let their population to keep the proceeds and start both saving (that'd encourage entrepreneurship) and consume (that'd... well, encourage entrepreneurship and production of increasing-quality goods for the local market) - instead of having politically-connected big guys to produce mountains of cheap crap for Americans in exchange for promises to pay back sometimes in the very-very far future, likely never. This way they'd already have the strongest economy on the planet - without any dependence on US plutocrats.

A.Prole said at October 5, 2009 12:15 AM:

The fact that China has a huge stock of wealth (including US dollars), has enabled it to ride out this depression relatiely unscathed.Its growth rates have held up at around the 8% level - industry has been switched to much needed capital investment from exports.
The key point is China can afford to do this - because of their big money stocks.The USA can't and won't do this, it simply hasn't got the money.
Who's the chump?

Rohan Swee said at October 5, 2009 7:57 AM:

The stupid Chinese "leaders" accumulated a pile of dollars which they cannot shift. The Fed keeps printing more dollars, at astonishing rate.

So... the Chinese send real goods to US and get freshly minted Fed IOUs in return. One day this scam will blow up and the Chinese will end up with a bunch of worthless paper, having worked hard for years and years.

Ah yes, Averros, the Chinese are soooo stupid, and we're such clever little swindlers. They'll have nothing to show for the last thirty years of hard work but a pile of worthless paper. No industries, no knowledge and technology transfer, no commodity access, nope, nothin' to face the future with. Ah yes, America's plutocrats have got them by the balls, and all we have to do is sit back and cackle at their foolishness. Uh huh. Not that American debt doesn't represent a problem to the Chinese, but I don't think they need any tips from us on how to be "smarter".

Mark said at October 5, 2009 11:51 AM:

To put it simply: China is willing to accept less for what it produces in the short term in order to increase its productive capacity in the long-term. Those dollars it is accumulating aren't buying them nothing - they are buying them the factories that used to be located in Western nations.

The end result is that we have to buy all our manufactured goods from them. Intellectual property? Well that's easy enough to steal, which they do in spades.

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