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The "savings glut" theory rears its ugly head again

by Jerome a Paris Thu Oct 9th, 2008 at 04:02:07 AM EST

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.

Monetary policy was a key component in this - cheap money allowed, through easy leverage, to increase the value of assets (whose distribution is even more skewed than that of incomes) and, more importantly, made it possible to hide from the masses, by providing consumer debt or house equity withdrawals to prop up their spending, that their incomes were stagnant - and were in fact being looted by the happy few whose pyramid scheme-like shenanigans are crashing down today (on us, not on them).

So sure, Asian countries had mercantilist exchange rate policies, and were happy to accumulate surpluses. Just don't dare say they started this. We did. On purpose.


Display:
can be explained in this graph from Wolf's article:

The eurozone has had a stable and balanced capital account throughout the past 20 years - no excessive reliance on foreign capital, and no excess lending.

As Wolf notes:


Last year, the aggregate surpluses of the world's surplus countries reached $1,680bn, according to the IMF. The top 10 (China, Japan, Germany, Saudi Arabia, Russia, Switzerland, Norway, Kuwait, the Netherlands and the United Arab Emirates) generated more than 70 per cent of this total. The surpluses of the top 10 countries represented at least 8 per cent of their aggregate GDP and about one-quarter of their aggregate gross savings.

Meanwhile, the huge US deficit absorbed 44 per cent of this total. The US, UK, Spain and Australia - four countries with housing bubbles - absorbed 63 per cent of the world's current account surpluses.

The bubbles created that.

The positions of Germany and the Netherlands on one side, and Spain on the other, raise the question of whether intra-eurozone imbalances change the picture, but frankly, I think not, as this reflects different economic specialisations within the wider region (export to the wider world or within Europe, different stages of development) - but others may disagree.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 04:11:56 AM EST

Dear Sir,

Martin Wolf ("Asia's Revenge", 9 October) brings up again the "savings glut" theory to try to partly exonerate Western financiers from their follies. While Asia's mercantilist policies, and their very real desire to no longer have capital account deficits are very real, their savings "glut" has been fully created by policies in the West. Central Banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates despite massive evidence of asset bubbles; in fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by other parallel policies such as labor market deregulation. Fundamentally, people in the West lived above their means. Together, these policies created an appearance of prosperity for all (GDP was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few. The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted prosperity of the past years in the West was essentially fake.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 06:25:14 AM EST
Very good.

As an alternative opening, how about:

The "savings glut" theory which Martin Wolf resurrects (...) fails to address the root cause of the financial crisis: the reckless dereliction of central bankers and financial leaders in the performance of their duties.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Thu Oct 9th, 2008 at 07:05:36 AM EST
[ Parent ]
I'm with you dvx.

I think it's hard to make the case that the saving glut has been created by the policies of the West. (hard does not mean impossible, but we'd be talking about a chain event. It's not the immediate consequence by any mean).

On the other hand, that it fails to address the root cause is clear enough. You would have had a bubble, Asia or no Asia, with those negative real interest rates for so long, coupled with next to no taxation on the proceeds of capital.

"The womb that spawned that thing is fertile yet"

by Cyrille (cyrillev domain yahoo.fr) on Thu Oct 9th, 2008 at 07:58:07 AM EST
[ Parent ]

ok, updated version


Dear Sir,

The "savings glut" theory which Martin Wolf resurrects ("Asia's Revenge", 9 October) fails to address the root cause of the financial crisis: the reckless dereliction of central bankers and financial leaders in the performance of their duties.

While Asia's mercantilist policies, and their very real desire to no longer have capital account deficits are very real, their savings "glut" has been fully created by policies in the West. Central Banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates despite massive evidence of asset bubbles; in fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by other parallel policies such as labor market deregulation. Fundamentally, people in the West lived above their means. Together, these policies created an appearance of prosperity for all (GDP was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few.

The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted - and very unequally shared - prosperity of the past years in the West was essentially fake.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 10:04:16 AM EST
[ Parent ]
Maybe this change too?
Dear Sir,

The "savings glut" theory which Martin Wolf resurrects ("Asia's Revenge", 9 October) fails to address the root cause of the financial crisis: the reckless dereliction of duty by central bankers and financial leaders in the performance of their duties.



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 9th, 2008 at 10:30:25 AM EST
[ Parent ]
It's not only dereliction of duty: real interest rates were negative for about 18 months aroung 2003 in the US, and also for a time in Spain (the ECB set interest rates for German levels of inflation) triggering asset bubbles.

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
by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 10:34:10 AM EST
[ Parent ]
I now see that the word "duties" was already part of the very sentence I was quoting!

Do completely ignore my comment above.

I need coffee.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 10:40:26 AM EST
[ Parent ]
However, rereading the original sentence:
the reckless dereliction of central bankers and financial leaders in the performance of their duties.
I would consider changing the of to a by. As it is, the sentence seems to indicate that the central bankers where neglected rather than neglectful.
by someone (s0me1smail(a)gmail(d)com) on Thu Oct 9th, 2008 at 10:48:59 AM EST
[ Parent ]
redrafting, because there are too many "very reals"


Dear Sir,
The "savings glut" theory which Martin Wolf resurrects ("Asia's Revenge", 9 October) fails to address the root cause of the financial crisis: the reckless dereliction of duty by central bankers, politicians and financial leaders.

While Asia's mercantilist policies, and their desire to no longer have capital account deficits are very real, their savings surplus has been largely created and fed by policies in the West. Central Banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates despite massive asset bubbles whose existence they denied against all evidence until the last minute. In fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by other parallel policies such as labor market deregulation. Fundamentally, people in the Anglo-Saxon world lived above their means. Together, these policies created an appearance of prosperity for all (GDP was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few.

The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted - and very unequally shared - prosperity of the past years in the West was essentially fake, as the current crisis reveals the hard way.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 10:59:53 AM EST
[ Parent ]

Dear Sirs,

The "savings glut" theory which Martin Wolf resurrects ("Asia's Revenge", 9 October) is a dangerous attempt to find mitigating factors to what is the root cause of the financial crisis: the reckless dereliction of duty by central bankers, politicians and financial leaders.
While Asia's mercantilist policies, and their desire to no longer have capital account deficits, are very real, their savings surplus has been largely created and fed by policies in the West. Central Banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates for too long despite massive asset bubbles whose existence they denied against all evidence until the last possible minute. In fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by parallel policy measures such as labor market deregulation. Fundamentally, people in the Western hemisphere lived above their means. Together, these policies created an appearance of prosperity for all (GDP was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few.

The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted - and very unequally shared - prosperity of the past years in the West was essentially fake, as the current crisis reveals the hard way.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 02:55:11 PM EST
[ Parent ]
Jerome, I hesitate to question you here, as my understanding of these issues is completely based on pop economics and folk Japanology, but I have always been under the impression that, at least in the case of Japan vis-a-vis the U.S., the policy of accumulating capital surpluses was quite intentional (on the part of Japan), and it was the U.S. that became the beneficiary of Japanese hyper-industriousness and monomania about building up foreign reserves.

Chronologically speaking, what came first: the emergence of U.S. policies that enabled/facilitated Japanese policies, or the other way around?

Truth unfolds in time through a communal process.

by marco on Thu Oct 9th, 2008 at 06:48:21 AM EST
If you look at the graph I posted in the comment above, you can see that Japan's surplus has been stable throughout the period, so their behavior was predictable in that respect and did not create new imbalances (I need to think about whether the permanent, if stable, surpluses are enough on their own to cause problems).

I'd respond, in a first attempt, that there was something substantially new in Western policies in the past 10 years, and that did not come from Japan (although they may have been part of the problem with their ultra-low interest rates in that period).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 07:20:02 AM EST
[ Parent ]

Following the problems in the sub-prime lending market in America and the run on Northern Rock in the UK, uncertainty has now hit Japan. In the last 7 days Origami Bank has folded, Sumo Bank has gone belly up and Bonsai Bank announced plans to cut some of its branches. Yesterday, it was announced that Karaoke Bank is up for sale and will likely go for a song while today trading of shares in Kamikaze Bank were suspended after they nose-dived.

While Samurai Bank is soldiering on following sharp cutbacks, Ninja Bank is reported to have taken a hit, but they remain in the black. Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank where it is feared that staff may get a raw deal.

PS - I just heard that the Bank of Iceland has had its assets frozen!




In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 08:25:41 AM EST
[ Parent ]
Um, is that The Onion?

Origami has folded, Sumo has gone belly up, Bonsai has cut its brances, Karaoke will go for a song and Kamikaze has nosedived?

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

by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 08:29:24 AM EST
[ Parent ]
It seems at least a year old and is reported on some many websites that it is impossible (or rather very tedious) to figure out where it originated.

BBC NEWS | Talk about Newsnight | Friday, 19 October, 2007

And finally Newsnight viewer Chris Mills sent in this Joke fit for an eleven year old:
"The knock on from the recent US sub prime market problems, that hit Northern Rock among others, shows no signs of letting up. In fact it has now badly affected the banking system in Japan. In the last 7 days the Origami Bank has folded, Sumo Bank has gone belly up and Bonsai Bank plans to cutback some of its branches....."

and so on
by someone (s0me1smail(a)gmail(d)com) on Thu Oct 9th, 2008 at 08:44:21 AM EST
[ Parent ]
I'll post anything I damn well please.

  1.  Woke up to CSPAN Washington Journal to find out that the US is interested in "nationalizing" banks ... your opinion?

  2. A lot of knuckle-dragging mouth breathers calling in; a lot of fear of "socialism".  Now THAT is something I could get into long term ... a diary series on the REALITY of socialism, not the marketing fear job done on Americans.

  3. Some of the callers are actually right on; GOOD to hear.  This is becoming quite funny.


They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Thu Oct 9th, 2008 at 07:20:20 AM EST
Just came from the Newser site.

  1. Hef broke up with his girlfriend.  Oh, the world IS ending!  How will I continue?

  2.  Question: Is the next DEPRESSION inexorably on its way?  What steps MUST be taken to stop it?

Get to work, you financial geniuses!

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Thu Oct 9th, 2008 at 07:41:27 AM EST
[ Parent ]
The National Debt Clock has run out of digits.  They're getting a new clock!

YOU CAN'T MAKE THIS SHIT UP!  BIZARRO WORLD.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Thu Oct 9th, 2008 at 08:07:13 AM EST
[ Parent ]
I can't believe they would advocate changing lending practices to incorporate collateral value TODAY.

It should be clear by now that this is fair-weather economics, shouldn't it? Linking credit and the housing market is procyclical and therefore dangerous.

Un rapport préconise de développer le crédit hypothécaire en France - Economie - Le Monde.fr

Les auteurs du rapport pensent que le financement de l'accession à la propriété dans l'Hexagone "aboutit à rationner le crédit" au détriment de particuliers qui, tout en étant solvables, n'entrent pas dans les critères des banques. "Une évolution est souhaitable", écrivent-ils, d'autant que la Commission européenne veut élargir le choix de crédits, notamment en assouplissant les conditions d'octroi du prêt hypothécaire.


Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Thu Oct 9th, 2008 at 09:17:49 AM EST
To one who has no expertise whatsoever in this area, your version at least makes sense. This glut theory just seems laughable to me.

On Wall Street isn't the simple answer to Where did the money go? that It was never there.? In the terms that I can understand.

Experience keeps a dear school, but fools will learn in no other. -- Dr Johnson

by melvin (melvingladys at or near yahoo.com) on Thu Oct 9th, 2008 at 12:11:09 PM EST
"On Wall Street isn't the simple answer to Where did the money go? that It was never there? In the terms that I can understand."

I wonder if those here who have the most insight into this phenomenon of "profit-taking" on sales of equities could comment: is this "money" fictitious in fact, or, rather, is it a matter more of whether one has bought real stuff in the nick of time with one's "profits", before they are unmasked as nothing but afflatus?

They tell us here in the US that about $3T has evaporated in the past week or two in the stock market. I doubt it can be that simple, but what do I know. Anyone care to fill me in here?

by MikeM on Thu Oct 9th, 2008 at 11:29:20 PM EST
[ Parent ]
I wrote something about that here. The bulk of the shares are priced at the margin, but that is a fiction. Just because individuals can sell 100 shares of microsoft for $2,230 doesn't mean collectivelly they can sell 1 billion shares for $22.3bn. When the average daily volume is 1/100 of the shares outstanding the market capitalisation of $200bn is a dangerous fiction.

Those $3tn "lost" could not have been realised.

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

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 03:40:48 AM EST
[ Parent ]
That helps a lot, thanks. And Jerome's comment in reply to your piece is vivid: Liquidity is the opposite of porn: you know it when you don't see it. So I guess the money shot here would be the fact that... there isn't any.
So much for mathematical macroeconomics, as you say.
by MikeM on Fri Oct 10th, 2008 at 01:18:24 PM EST
[ Parent ]
Just for the record the "fear of what had happened to its neighbours during the Asian crisis" is not some neutral issue like fearing earthquakes or typhoons.

The worst effects of the Asian crisis were created by IMF policies (as documented by Stiglitz.) (Such policies were designed to benefit Western banks at the expense of these countries.) As such we can very likely say that the worst effects of the Asian crisis were created by Western policies and Western policies made mercantilism the only rational path for Asian countries to pursue.

by Metatone (metatone [a|t] gmail (dot) com) on Thu Oct 9th, 2008 at 12:49:37 PM EST
J. A. Hobson's analysis in Imperialism, 1902. only needs some modification to explain the current situation.  In his analysis imperialist countries at the turn of the 20th century, especially GB, by virtue of keeping domestic wages low, had surplus capital for which they wanted to find profitable investments.  This was, in large part, satisfied by investing in infrastructure and resource extraction in imperial dominions where their investments were protected by colonial administrators and, ultimately, by the military might of the imperial power.  Domestic allies prospered by building the ships and making the arms, etc.  The current US adventure in Iraq can be seen as a crude failed attempt at such a traditional approach.  But attempting such an approach with China would be seen as madness by almost all US citizens.

The US approach since the 1990s has involved the destruction of domestic industries that provided high wage jobs by buying up companies, shutting down US production, exporting the manufacturing equipment to China and purchasing similar goods from newly minted Chinese manufacturers at a fraction of the cost.  The fact that the quality and hence the value of the Chinese goods was often significantly lower was compensated for by their stunningly lower prices, which were affordable by a relatively impoverished population now working at jobs with far lower wages and less benefits.  The profits were in the retailers, (where labor costs were traditionally lower,) who distributed the Chinese goods, by those who handled the shipping and distribution of these goods, and by those in the financial sector who set up the arrangements.

Given the cost of labor in China, which is held low by   more than one billion rural agricultural population longing for even marginally greater income, the Chinese government took dollars from the US and required workers to be paid in renminbi.  The effect was that they accumulated over one trillion of US dollar denominated government paper.  They couldn't have paid their workers anything like the value of their labor without setting off even more rampant Chinese inflation.  Much of it went into the US real estate bubble via MBSs and CDOs from Fanny and Freddie, etc.  In a very real sense, the US exported employment and imported under-employment in the form of Mc-jobs.  We also exported the capital surplus so as to get it back in the form of loans to further inflate the real estate bubble.  This was the source of the benefits of this cycle which were in the form of fees and profits on the transactions in the financial sector that accompanied the "securitization" of the economy.

Hobson noted that Imperialism was a bad deal for the imperial country as a whole, but that it was highly beneficial to a particular elite.  The results of the "globalization" version of financial imperialism have been and are being vastly more damaging not just to the US domestic economy, but to the whole world.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 9th, 2008 at 04:17:11 PM EST
Jerome, your Anglo Disease theory (to the limited extent I actually understand it) seems to imply that, as a result of cheap money, external deficits and capital inflows, the US and UK have been disproportionately responsible for creating the conditions under which the current dislocation has taken place.

Does that plausible conclusion imply that the rest of the world will, to some unknown extent, now have to detach itself from the Anglo system, thereby dethroning the dollar as the world reserve currency and gradually moving New York and London awau from the world's key finance paths?

If such a detachment does begin to take place, should we expect, for example, failing US Treasury auctions and a bankrupt Treasury, in fact if not in name? A rising fraction of international business transacted entirely in non-dollar currencies?

by Ralph on Thu Oct 9th, 2008 at 05:53:44 PM EST
I think, is to cut down the financial sector to size, and reduce its influence on the economy and on policy making, by turning it back into a boring - and heavily regulated - service provider.

That should easy in most places; it will be hardest in the UK and the US given the size of the sector there and its political power.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 08:09:11 AM EST
[ Parent ]


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