by Jerome a Paris
Wed Jan 9th, 2008 at 04:39:49 PM EST
|Challenges for the world’s divided economy|
By Martin Wolf
That there was a link between the savings glut and the financial fragility was evident. The former, I argued, generated the global imbalances and the monetary policy that drove household borrowing to the level required to absorb the capital inflow. Soaring house prices and rising household indebtedness were the vehicles through which policy worked.
|America’s inflated asset prices must fall|
By Stephen Roach
The US has been the main culprit behind the destabilising global imbalances of recent years. America’s massive current account deficit absorbs about 75 per cent of the world’s surplus saving. (...)America’s current account deficit is due more to bubbles in asset prices than to a misaligned dollar. A resolution will require more of a correction in asset prices than a further depreciation of the dollar.
|As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard note in a brilliant new paper [pdf!], this had similarities to the recycling of petrodollars to developing countries that preceded the debt crisis of the 1980s. This time, surplus savings were, in their words, “recycled to a developing country that exists within the US”: the subprime borrowers.||America’s aversion toward saving did not appear out of thin air. Waves of asset appreciation – first equities and, more recently, residential property – convinced citizens that a new era was at hand. Reinforced by a monstrous bubble of cheap credit, there was little perceived need to save the old-fashioned way – out of income. Assets became the preferred vehicle of choice.|
It is fascinating to see how these two economists look at the same phenomenon, see completely different things, and yet avoid the core underlying topic:
For some (unexplained) reason, this is unsustainable and crashes. Financial crisis occurs, but only in the US. The Third-World-Within (a significant chunk of middle class Americans) can be blamed for it. And they'll support most of the consequences, so all is well.
- China and Russia earn dollars
- China and Russia save dollars, creating "savings glut"
- USA is "forced" to borrow dollars
- Consumers spend all that easy money
- Asset prices, among others, soar
This is (more understandably) unsustainable. Spending cuts and housing crash will feed one another and drive a painful recession. China has very little to do with this whole process, other than to ride it.
- Credit is too cheap (thank you Bubbles Greenspan)
- Easy credit causes asset prices to inflate
- More valuable houses can be used as piggy bank/ATM
- Consumers spend all that easy money
- US consumers live beyond their means
As readers know, I'm very much on the Roach side of this fight about causality. At least everybody agrees now that there was too much debt, and that there will be a retrenchment of consumption in the US. Both move to different conclusions to their papers (Wolf to note that the emerging world will escape the crisis and continue to grow nicely, Roach to note that a dollar devaluation is not a solution to current problems), but both ignore the elephant in the room:
China's not spending its savings, and America's not building its savings are caused by the same thing: insufficient household income, due to stagnant (in the USA) or trailing (in China) wages.
In the US, workers faced with stagnant incomes resort to debt; in China, consumers don't get access to a fair share of the dollar surplus generated by US imports and their government recycles the resulting unspent dollars into international financial markets.
This is what profit-driven macroeconomic policies (supported and abetted by China's mercantilist urges, which form an integral part of the package) want: cheap "flexible" labor. And we're getting the logical consequence of that - not enough demand, after all artificial ways to prop it up have been exhausted. Workers are broke, and there is nothing left to squeeze out of them. But hey, it's their fault - and their problem.