From Jame DiBiasio to Dan Slater:
I have a few criticisms. The main one concerns the writerÆs (and your) attack on investments as a substitute for savings. Interest rates today are far lower in many countries than they used to be, therefore putting money in the bank will not provide adequate retirement protection.
In places like China today, and recently in the US (when Greenspan drove the fed funds rate to 1%), bank deposits cost you money in real terms. Although inflation has been subdued in the past few years, there is no guarantee that it will not return û in fact, the return of inflation in oil prices etc is a driving fear among central bankers today. This may have been less important in the days of the iron rice bowl, the Japanese seniority system or the guaranteed defined-benefit corporate pension fund. But these are all broken.
People must fend for themselves and the only way to prepare a dignified retirement is to invest for the long term in equities.
Secondly, it is too simplistic to accuse Americans of relying on their homes for consumption. In many cases, the inflated housing markets represented second homes for wealthy people using bonuses. They will feel pain but as long as they hold onto their jobs, the housing problems wonÆt translate into outright economic recession. If this in turn seems an equally glib interpretation, then let me say simply the US housing market is huge and diverse, and that demographic trends suggest more households and more demand for housing over the medium term.
Are the Chinese really such great savers? The 40% national savings rate that is often bandied about reflects mainly government and corporate savings. Individuals do not save 40%; the vast majority of peasants could never afford to do so, and rich people in China appear to enjoy consumption just as much as their American counterparts û at least thatÆs what I sense walking through Hong KongÆs shopping malls.
In fact most savings in China are saved simply because institutions, government and individuals have no other choice. This is why China must continue to recycle its foreign reserves through AmericaÆs efficient financial markets, instead of finding useful ways to invest that money at home, where investment is surely needed. The spectacular growth of China's mutual funds industry is testament to the huge, pent-up demand for alternatives to bank deposits. In the long term, QDII will be a success because there is demand for high-yielding assets. Whether this is prudence or madness I cannot say, but either way it rather squashes the notion that Chinese are conservative, diligent savers and Americans are drunken squanderers.
It does seem likely the US will print its way out of debt, and this is a long-term problem for it and for financial markets. But by long term I do mean long, provided at least that the US does not succumb to rampant protectionism.
Dan Slater responds:
Nice, but ultimately, China is generating real money. The US, admittedly thanks to its superior financial system, is recycling other peopleÆs money and printing money, ie living off debt. The savings rate is secondary to that. IÆm not bothered whether companies or individuals save û the point is that itÆs debt-based growth.
DiBiasio to Slater:
The savings rate is important. You borrow because you donÆt have enough savings. US debt is pretty shocking; of course there are chickens that will come home to roost. But there are some mitigating factors. The US economy creates far more wealth than the Chinese one. Until about a year ago, it was the only serious economic engine worldwide, one factor behind American consumption. ItÆs absurd to argue that the US economy is driven primarily by debt.
Corporate balance sheets are well in the black. Chinese goods are cheap but that doesnÆt mean labour productivity is high, whereas productivity remains strong in America, job creation is on track and income is rising.
Second, while US savings are basically zero, it is in part because people have transferred wealth into stocks and real estate. There's something like $14 trillion in the US mutual funds industry. Do you really need bank savings, particularly in an era of low interest rates and low unemployment levels? Of course markets go down as well as up - but banks can go bust too. Which is safer in the long run: the US stock market as a generator of risk premium returns, or deposits in your typical Chinese commercial bank? Where would you put your money?
Even comparing welfare arrangements, the US, which scores so poorly compared to Canada and Europe, still does far better than China. My Social Security cheque will be a pittance but it will be there. CanÆt say the same for China (yet; it is making some bold reforms).
The US current account deficit has many causes. Are US consumers uniquely profligate? File this one under any number of Asian credit card crises (Korea, Thailand...). Perhaps they are simply uniquely wealthy. And while the scale of the imbalances is scary, imbalances per se aren't bad. They have helped keep interest rates low, stimulating investment and enabling people to afford housing, etc. Does consumption create the deficit or does the deficit pave the way for consumption?
More troublesome is government indebtedness. The US government is clearly borrowing too much (and spending too much). The biggest problem is entitlement programmes: Medicare, Medicaid and Social Security. There are no simple solutions to this, it is a Gordian knot, and these rising costs will eat away at AmericaÆs ability to, for example, afford a robust military. But as recently as the Clinton presidency we were in surplus, and as a proportion of GDP, todayÆs government debt is not a historical record-breaker, nor the biggest in the world (see Japan and Germany). So this situation needn't be permanent.
AmericaÆs problems are real but we do not face some of ChinaÆs long-term problems such as the environment, a rapidly aging population, a poor education system and an inherently vulnerable political system. China has spectacular economic growth and vibrant croo û er, entrepreneurs û which is fortunate because it will need every little percentage of GDP gains just to keep the ship afloat. Both countries in fact need each other, badly.
Slater to DiBiasio:
By GDP, the US creates at least 5x-7x as much as wealth as China, whatever æwealth creationÆ means.
But the point is not the quality of the underlying companies. The US has better companies in every way. That alone does not prevent a country from living beyond its means, as the US is doing, and does not mean it will avoid the consequences.
The US will have to change its currently fatal trajectory, and that will involve a huge negative dislocation (contraction). The equivalent shift in China (when it decides to transfer US purchasing power to its own population by allowing its currency to rise) will be hugely positive.
Yes, imbalances favour the US, of course! They are obtained on the back of the sweat and blood of the Chinese, their wrecked environment and their child labour. And sooner or later the Chinese will take payment for that. There will be a reckoning.
It reminds me of the old saying about giving someone enough rope to hang themselves with.
I disagree that US companies are unambiguously in the black. How do you account for debt? How do they look on an enterprise value basis? In any case, debt is a dynamic concept which becomes ever more damaging as the economy winds down. Benign debt levels now will look very different in a downturn.
DiBiasio to Slater:
Yes the US will have to change. The question is how quickly, and in what circumstances. The risk is a dollar crisis precipitated by large and unexpected sales of US Treasuries or other dollar assets by global investors, perhaps stemming from the US government's insolvency. This scenario is possible, but is it more likely than other scenarios?
For example, the US is no longer the sole economic engine. China and India have emerged as engines in their own rights and Germany is humming once again. This means more opportunities for US exporters, helped by a weak dollar. Higher oil prices and falling home values mean US consumers have less to spend. A mild recession led by high oil prices is probably the best thing that could happen to the US because it would remove some of the excess.
IÆd argue it is more likely that these global macro imbalances will be temporized by market forces û with bumps along the way but not a Great Depression.
You can say US consumption is obtained on the back of Chinese misery but it is just as easy to say that ChinaÆs laudable economic growth is thanks to exports to America. The great American consumer was the only lifeboat for Asian economies during the financial crisis of 1997-98; these countries became incredibly reliant upon their exporters. ChinaÆs success is due to its sweat and toil, but also partly due to multinational companies outsourcing their manufacturing platforms there to then send finished goods back to developed countries as imports.
To talk of reckonings is silly, at least in your emotional language; todayÆs imbalances may be dangerous but they reflect an arrangement that continues to benefit both China and America. If there is to be a reckoning, however, it might be the Chinese reacting against the Communist Party.
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