European Tribune - Musings on the savings-glut theory
They did so because they feared the possibility of a shift into deflation. The Fed, in particular, found itself having to offset the contractionary effects of the vast flow of private and, above all, public capital into the US.
Why is this flow of capital into the US contractionary?
This might or might not be contractionary from the point of view of GDP - which is the next part of the question.
What's strange to the point of being exotic is that apparently China was flooding the US economy with a savings glut, creating this danger of contraction, while simultaneously leaching money out of the US by way of its aggressive export strategy.
This only makes sense if you can accept that dollar reserves appear in at least two and possibly three places at the same time.
They're part of the US balance sheet, included in whatever it is that the Fed does when it tries to pretend to balance the monetarist books.
They're owned - or possibly borrowed, it's hard to be sure - by China and other US semi-colonial states, and considered savings.
And some proportion is also invested back in the US money markets as both sovereign funds and private investments, which not only hammer interest rates into the ground but simultaneously help drive a massively leveraged lending bubble.
This is not inflationary, as we all know, because asset inflation isn't counted in the same way as wage inflation or commodity inflation.
Finally - true quantum economics; the same capital, which only exists by fiat anyway, not only appears in many places at the same time, but has opposing effects depending how you count it.
Nobody in China ever prevented the US from focusing that finance on electrifying the strategic rail network and putting a national inter-regional HVDC grid in place, while establishing feed-in tariffs to encourage investment in domestic renewable energy production.
The decision to use the external finance for a consumption binge rather than an investment drive was entirely made within the US. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Correct me if I'm wrong. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
If the US were to use Chinese finance to build infrastructure, that would attract foreign direct investment in the US, which would tend to push up the value of the US$, which would finance a manufactured goods trade deficit and, yes, the Chinese could shift their focus to maintaining a discount of the yuan/renminbi against the Euro, Yen, Pound Stirling, etc.
But its only perfect information in marginalist modeling that eliminate the impact of timing ... infrastructure construction is an increase in effective demand during the construction of infrastructure ... it is not a contribution to productive potential until it comes online.
Or, for a historical example, after the establishment of the Euro, with the creation of a Euro capital market with the same depth of liquidity as US$ capital markets, and without a foreign exchange risk, there was a substantial amount of acquisition of US-owned Eurozone operations by Eurozone domiciled corporations. As that acquisition wave was in place, it depressed Euro exchange rates against the dollar. Once the wave had passed, with the reduction in income account outflows from the Eurozone to the US, the long term impact was an increase in Euro exchange rates against the dollar.
Of course, with perfect foresight there is no such wave effect ... just as with an adequate wingspan and sufficiently strong flight muscles, pigs could fly and shares in the reinforced umbrella industry would be a growth stock. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
I agree with him, but my point is that inflating a bigger bubble to avoid the effects of the previous one only pushes the problem a little further down the road (ie now) and makes it even worse wehn it hits (as we now see).
The problem was not the defict of the US - its was its growing deficit over the past few years. A stable deficit over the years is possible, especially when you own the world currency, but a growing one becomes a Pnzi scheme at some point. In the long run, we're all dead. John Maynard Keynes
I agree with him
So you don't dispute that the Chinese surplus had a recessionary impact on the US. And moreover
The problem was not the defict of the US
What makes no sense is the following: as a result of the .com bubble bursting there was excess capital in non-financial corporations, and underinvestment (claims Wolf)
The savings glut had another dimension, related to a second financial shock - the bursting of the dotcom bubble in 2000. One consequence was the move of the corporate sectors of most high-income countries into financial surplus. In other words, their retained earnings came to exceed their investments. Instead of borrowing from banks and other suppliers of capital, non-financial corporations became providers of finance.
In addition there was a global shortage of capital due to the Chinese ability to absorb huge amounts of investment through its massive and cheap labour force. So we have excess capital in the US and scarce capital abroad even despite the huge Chinese reserves (though we had a debate here where the conclusion seemed to be that reserves are not really a pot of money that can be sent or invested). This again leads to US capital being lent abroad. This is a carry trade: borrow dollars to lend in other countries, and the Fed lowering interest rates just makes matters worse by making it even cheaper to borrow dollars.
So I am beginning to think that the key is the excess capital of non-financial corporations in the US. JK Galbraith would say that high retained earnings and reduced reliance on external borrowing are the signs of a healthy corporation. So, after the .com bubble the non-financial corporations that survived were in good shape (as apparently is notmally the case in the slow years after a crash). What was in bad shape was Wall Street, which couldn't lend to US corporations and so faced reduced turnover and lean times. So it then appears that the Fed's expansionary monetary policy was intended exclusively (since all the other alleged reasons don't hold water) to allow Wall Street to create a bubble to feed off. Also potentially to create a big pile of money to fund the Iraqi adventure. And then the whole China story is just smoke and mirrors to hide the fact that Fed policy was set for the exclusive benefit of Wall Street. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
External borrowing to consume in excess of existing rates of income growth is not a sustainable activity. External borrowing to invest in higher sustainable growth rates may be, depending on the terms and the realized benefit of the investment.
Clearly, the US has been borrowing to consume over the past 14 years. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
