Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:18:44 PM EST
Savings glut vs income shortage by Jerome a Paris on January 8th, 2009
Martin Wolf is still pushing the savings glut theory in his column yesterday and, predictably, calls for countries with large surpluses (China and Germany first and foremost) to increase their spending to save the world economy, as the debtor nations can no longer increase their debt to sustain activity, as they used to until the crisis. and he promises (should this be worth a Godwin alert?) 1930s turmoil if this does not happen:
think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened - in the 1930s - the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past - above all, nationalism - will return. Achievements of decades may collapse almost overnight.
But I think he misses the point. The problem is not one of insufficient demand (which he proposes to boost via US budget deficits and, idieally, spending by China and Germany), the problem is one of insufficient incomes. If the US spends more debt-provided money, it will only generate distortions and imbalances to the economy, which will still need to be corrected later. If Germany or China spend more, it will only mean that they will be buying their own goods instead of Americans doing so: it will not improve global welfare, as it means Americans with less junk and Germans with more (presumably making both unhappy). No, what is needed is for spending to be increased in a sustainable way, and that can only happen if incoems increase. Wages (income for workers) need to be increased, and taxes (income for govenrment) ditto. Otherwise demand will shrink.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:19:02 PM EST
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The "savings glut" theory rears its ugly head again by Jerome a Paris  on October 9th, 2008
Martin Wolf is back (see this earlier article which I discussed back in June) with his theory that the imbalances that led to the current crisis were caused to a significant extent by Asia's saving glut:
Any country that receives a huge and sustained inflow of foreign lending runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. Precisely such a crisis is now happening to the US and a number of other high-income countries including the UK. These latest crises are also related to those that preceded them - particularly the Asian crisis of 1997-98. Only after this shock did emerging economies become massive capital exporters. This pattern was reinforced by China's choice of an export-oriented development path, partly influenced by fear of what had happened to its neighbours during the Asian crisis. It was further entrenched by the recent jumps in the oil price and the consequent explosion in the current account surpluses of oil exporting countries.
While there is truth to the fact that Asian countries sought to protect themselves from capital deficits, the reason for their capital surpluses comes from our deficits, which were themselves the result of coordinated policy choices - what I have dubbed the Anglo Disease: the ideological choice to favor the income of the rich, by a combination of deregulation of corporations and finance, downwards pressure on wages, lower taxes, and the idolisation of financial investment and financial valuation of everything.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:20:38 PM EST
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Musings on the savings-glut theory by Migeru on October 17th, 2008
To paraphrase, Wolf takes a cue form a 2005 speech by Bernanke and blames East Asia's (and especially China's) mercantilist policies for the credit crunch. Jerome replies that wealth capture is not wealth creation. I guess part of my problem is that the two positions are not incompatible, and Jerome 1) doesn't refute that East Asia has been mercantilist; 2) doesn't refute the argument that this is the root cause of the asset bubble now deflating. Even if Wolf were to accept Jerome's contention that the bubble was a Western policy choice, Wolf's argument seems to be that there was no good policy path out of the situation created by China's dollar peg and that deflation and recession were inevitable and Jerome doesn't address that.


So, the question which Wolf skirts is, without risky monetary policy, lax regulation and irresponsible finance (which, together with finance's oversized share of GDP, is what Jerome calls the Anglo Disease) would the global imbalances have led to a different outcome? Wolf is trying to argue that the Anglo Disease was incidental. Jerome, that it was fundamental.


In other words, to the best of my understanding, because China was hoarding US dollar reserves (and also as a result of the popping of the dot-com bubble), the US economy was in danger of monetary deflation and therefore the Fed had to run an expansionary monetary policy of real negative interest rates which kicked off the credit bubble. That is, because China was draining money out of the US economy the Fed had to keep printing more. And this would have depressed the US exchange rate with the Yuan until the trade balance became zero except that China had a dollar peg. So we have a situation in which the Chinese dollar peg causes runaway debasement of the dollar as China and the US run to stay in place relative to each other. My problem with this is that I don't find it intuitive at all, and Wolf assumes that it's either well known or bleedingly obvious. But on this hinges the whole argument.

In the comments, Jerome ends up not disagreeing with Wolf on the deflationary effect on the US economy of the Chinese dollar peg.
I wrote again to Martin Wolf, after the initial exchange and after receiving Mig's initial comments on the fact that we did not need to borrow the Chinese surplus. Martin Wolf replied that there would then have been a nasty recession in the US.
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 Ponzi scheme at some point.

Also, BruceMcF wrote
If the US is engaged in the borrowing, clearly the role of the Chinese here is in accommodating, not in causing, the long term unsustainable GDP growth model. And that accommodating entails finding a mechanism for providing the external finance so that the US could continue to purchase Chinese exports, even though the US was on a growth path that is unsustainable in the long term.

Now, is this recessionary? Compared to what alternative? The Chinese have simply been in no position over the past two decades to dictate to the United States that is must adopt a sustainable GDP growth path. The only choices that it has had have been to either accommodate the growth path, putting off the day of reckoning, or refusing to accommodate the growth path, bringing forward the day of reckoning.

Given their own position of riding a massive demographic transition from the insanely unsustainable  pro-population-explosion policies of Mao to the population-control policies of Deng, instituted in 1979, the Chinese really had no choice but to accommodate.

The only side with actual freedom of action in the bilateral relationship was the United States, and our political elite choose to pursue a financially unsustainable GDP growth path.

(Bruce's argument is much longer and more technical, and well worth a read in full, but that's the conclusion)

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:31:17 PM EST
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Paulson pushes to blame "savings glut" by Jerome a Paris on January 3rd, 2009
We now see the second part of the strategy to push the blame somewhere else, ie on China and Germany: it's not the borrowers, and it's not the financiers either who are to blame: they were "forced" to deal with the surpluses of the countries that save more than they should, and so much money put in their highly competitive hands brought financial returns down and pushed them to seek riskier pastures to use that money. So they misallocated funds, and blew them, only because they had too much because the stupid Chinene and Saudis just have too much money!


This not only pushes the blame away from the policies of the neolibs (income concentration for the very rich, leading to income stagnation for everybody else, hidden from view by cheap and plentiful debt allowing consumption to continue), it also provides a convenient reason not to re-regulate the financial world. It's NOt the financier' fault, don't blame them! (*)


I expect this concept to be massively pushed in the coming months, with all the accompanying China- and Germany-bashing. The Germany-bashing is already in ful swing, as it includes the added bonus of an Europe.Is.Doomed angle... see all the articles about how Germany is pushing the whole world into a depression by refusing to be bamboozled into a massive spending spree - how Germany diplomacy is failing, and how Merkel's star is fading, and the mocking, snickering tones about the Germans who thought they were being prudent by not joining the fun and now are suffering as much as those that had fun while it lasted.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:22:33 PM EST
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