Wed Jun 9th, 2010 at 05:30:44 AM EST
Back when the Americans had their panic(s) a couple of years ago, European Tribune was very quick to disassemble the "Savings Glut" theory promoted by Helicopter Ben and the salmon-coloured press.
The Savings Glut theory goes something like this:
China saves more than it invests. China's excess savings must be recycled. The US is the default place to recycle excess savings. This creates a US current accounts deficit and lowers US interest rates, causing a bubble, which causes a panic.
The ET critique is that (1) China's saving is the consequence, not the cause, of American CA deficit. China pegs its currency to the US$, and in order to maintain this peg it must use open market operations to counteract any American CA deficit against it. Otherwise, the US$ would fall against the Yuan. (2) It was always in the US' power to raise interest rates and/or use the low interest rates to finance investment in real physical assets, instead of consumption. And (3) bubbles don't happen just because of low interest rates - bubbles happen in the presence of particular circumstances of collective psychology, which it is within the power of economic policymakers to abet or suppress.
front-paged by afew
A few years later, Greece is hit with a crisis. The Conventional Wisdom is that Greece's problem is profligate welfare spending, which creates an unsustainable sovereign and current accounts deficit.
European Tribune regulars were quick to point out that Germany runs a trade surplus against Greece, that Germany maintains this trade surplus by pursuing a mercantilist inflation policy.
On the face of it, this seems not a little contradictory: When Germany runs trade surpluses, it causes deficits in Greece, but when China runs trade surpluses it is caused by deficits in the US. Or, if we wish to put it a little unkindly: When a European public sector runs an unsustainable deficit, it's because of foreign manipulation, but when the American private sector runs an unsustainable deficit, it's their own damn fault.
Of course there are differences.
- One obvious difference is that the US had more options than Greece did to avert the crisis: Greece did not have the option to raise interest rates during the boom, nor to devalue its currency now (both of which options the US enjoys).
- The second obvious point is that the relative power of the different actors is different: Germany is much bigger and more powerful than Greece. The US and China are much more evenly matched, with most WesternTM analysts giving the advantage to the US.
- The third difference is that Greek sovereign debt was being deliberately manipulated by actors on the financial markets. So was the American sovereign debt, of course, but in the case of Greece, the manipulation took the form of a pernicious pump-and-dump operation, whereas in the American case, the manipulation took the form of several emerging economies pegging their currency to the US$. The former sort of manipulation is apt to worsen a crisis, the latter to dampen it.
The interesting point for me is whether these differences are sufficiently significant to warrant the apparent turnabout in our conclusions, or are we simply pandering to the explanations that accord best with our pre-existing pro-public pension/anti-private banker biases?