Big savers got us into this mess, as well as big spenders, by Robin Wells, Commentary, Comment is Free: The world is trapped in a global savings glut. It is both the source of our economic woes and an obstacle to the task of pulling ourselves out of the ditch. Worse yet, the glut’s continued existence will feed a succession of asset bubbles until we confront it, head on, and find ways to soak up the excess.
Yes, we can blame the City and Wall Street for turning the global savings glut into fissile material. But that’s like saying, “hyenas do what hyenas do”. Given extraordinarily lax regulation and a flood of money to play with, bankers were just acting according to their incentive schemes. They merely took advantage of the opportunities the glut presented. The real culprits are thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems.
The flood of savings in the global economy arose from Germany and China’s persistent trade surpluses over the last decade. A country with such a surplus sells more to its trading partners than it buys in return. Persistent deficit countries – the US, Britain, Iceland, and the eurozone excluding Germany, France and Italy – sell assets to the surplus countries to pay for their deficits. Thus persistent surplus countries accumulate the assets of persistent deficit countries: in the case of China, US treasury bills; in the case of Germany, Spanish eurobonds, sterling notes, and US sub-prime mortgages.
What makes this a global glut is that the world as a whole is saving more than can be profitably invested. The corollary is that, eventually, those funds will earn less than nothing. And through financial engineering, those losses are now distributed around the world.
What was the cause? Germany’s surpluses were a result of its attempt to export its way out of the stagnation arising from the reintegration of east and west Germany, and to support an ageing population. Its excess savings were spread among the investment hotspots of Spain, Portugal, the Baltics, Ireland, Iceland, Britain and the US.
The origins of China’s persistent surpluses are more ominous. Data from China’s central bank show that the steep rise in income over the last 10 years created by export-led growth largely bypassed ordinary households. In contrast, from 1997 to 2007, corporate profits as a percentage of income nearly doubled, reaching 23%. And the principal beneficiaries were the state-owned enterprises. Politically powerful, they enjoy a privileged position – with cheap government-directed credit, subsidized access to resources, and low wages without worker protections, they effectively transfer income from workers to state-owned enterprises. Unless the government spends some of its huge holdings of US Treasury bonds to help its citizens, or compels state outfits to share their profits with households, one must question whose interests within China are being served by these policies.
The short-term problem of managing the fallout from the savings glut and the longer term problem of ending it both appear devilishly hard. Because hard-hit eurozone countries can’t use currency depreciation they face years of grinding asset and wage deflation. To add insult to injury, the European Central Bank’s relatively tight monetary policy is better suited to Germany than to devastated deficit economies like Spain.
It is Britain’s good fortune to possess a falling pound, which almost certainly will allow it to recover more quickly than troubled eurozone economies. And the UK has dealt forcefully with its crippled banks in comparison to the US. In both countries, however, deregulation of financial markets led to excessively large financial sectors, fuelled by merchandising of the savings glut, leaving them unable to confront the mounting consequent problems.
Until the savings glut is vanquished, asset bubbles and instability will be fed, exacerbating income inequality and favoring wealthy bankers and the Chinese elite. It will continue drawing resources away from productive sectors of the economy and channeling them into high-paying but socially useless financial engineering – or into yet more excess capacity.
Short of a miraculous new technology to soak up the savings glut, a global rebalancing of production and consumption will be necessary. Persistent surplus countries will need to save less and consume more; deficit countries will need to consume less and save more.
In practice Germans will need to overcome their fear of fiscal deficits and become less export-dependent. China will be a harder case. According to the European Chamber of Commerce, China is adding excess production capacity at a breakneck pace. And by keeping the yuan artificially low, it is stymieing global rebalancing. After it recently told the US and Europe to butt out of its currency affairs, western leaders may find the threat of sanctions is the only way to get the attention of China’s state-industrial complex. Afflicted eurozone countries should insist on looser monetary policy and curbs that will prevent internal eurozone trade imbalances getting out of hand again.
And eventually, but not until their economies are clearly on the mend, Americans and Britons will have to get their fiscal houses in order. In the end, perhaps we will have learned from this experience just how expensive cheap credit and excessive thrift can be.
Originally published at Economist’s View and reproduced here with the author’s permission.