Chinese Underconsumption Didn't Cause Recession

One of the more commonly cited reasons for the Great Recession has been an unexpectedly high savings rate among the Asian countries. The logic implies that by over-saving the Asians financed cheap consumption in the rest of the world. Frankly, it never made much sense to me and now the some Asian officials are pushing back.

From the WSJ:

“Asians financed cheap consumption in the rest of the world, this is what they say. This is something I just cannot understand,” Supachai Panitchpakdi, the head of the United Nations Conference on Trade and Development, and a former Thai government official, told a conference Friday. “This is another theory we have to debunk. Asians have not been over-saving and under-consuming.”

The real difference between Asians and Americans, Mr. Supachai argued, is that American consumers borrowed heavily to finance their spending while those in Asian nations mostly didn’t. He said that consumption levels in Asia are “normal,” averaging about 40% of gross domestic product. He acknowledged that household consumption in China is relatively low, at 36% of GDP. But he said that’s because growth in investment and exports have been very strong, not because consumption has been weak.

The idea of a “savings glut” – an excess of cash in Asian countries and oil exporters that pushed down global interest rates – was first popularized by Ben Bernanke in 2005, before he was governor of the Federal Reserve. Economic officials in the Bush administration later endorsed the idea that it was a contributing factor to the financial crisis.

Critics of the savings glut thesis have often argued that it simply pushes responsibility for U.S. policy mistakes onto other countries. Supporters reply that China’s huge trade surpluses clearly had real effects on the global economy.

The Chinese made us do it argument was probably always less about reality then it was about constructing a defense for policy failures in our government. It’s cover for the Fed, Congress and the Bush administration. Unfortunately, by hewing to these sorts of dodges we put off facing the reality of what went wrong, and when you do that you usually don’t end up with good fixes.

Comments

[Dave Wrixon:]

Who could argue with that?

Well, I am sure many will, but they won't be given any credibility here!

Jul 05 05:39 PM

[Adam855:]

I'm not sure how saving money has somehow become a vice among some economists (including our current Fed chairman!).

Is the current 6-7% savings rate in the US now a new savings "glut" or "bubble"? :)

Jul 05 08:57 PM

[derryl:]

How would a supranational reserve currency, a gold standard, have altered US/China trade imbalances? Gold flows out as goods flow in. The Chinese would have ended up with all the gold then, what? Lend it to the US so Americans can continue buying their stuff? Shut down both trading economies for lack of a medium of exchange? Isn't that where we're at now?

"It takes two to tango", as the related article above is titled. I think it is just as irresponsible to extend too much credit to a profligate borrower as it is to be the profligate borrower. Eventually you are both in trouble.

I don't think a new gold standard could prevent this kind of imbalance from recurring, though if the US had been unable to freely print the currency of exchange and was limited by its stock of gold the imbalance couldn't have become so large. But the savings glut argument is basically saying, "You should have known I could never pay you back so it's your fault for lending me all those goods." That's pretty weak.

Jul 05 10:31 PM

[conceptwizard:]

We are not really saving as the sense of money in the bank. the savings number is just a reduction of debt.

China is being forced to rebalance. It’s clear that, regardless of the angle from which we examine the situation, our economy is being squeezed by internal and external crises. Excessive consumption in the United States is a root cause of the global financial crisis.
And even if China’s trade surplus stabilizes in dollar terms and shrinks relative to China’s GDP, China is on track to double its foreign assets – and its US holdings – over the next four years. Think a $350-400 billion annual increase in China’s dollar assets, and a $500b plus increase in China’s foreign assets.

That prospect should scare China’s leaders...

To be clear, the basic risk China is running hasn’t changed all that much recently. China’s government fundamentally is overpaying for dollars (and euros) to hold the RMB down to help China’s exporters. That policy always has carried with it a high risk of future financial losses.

Jul 05 11:33 PM

[mariocavolo:]

Don't forget that as the new burgeoning China middle class continues to emerge, consumption spending is on the rise big time with the savings rate declining...Cheers, M

Jul 06 01:54 AM

[W.E. Heasley:]

Excellent article.

Jul 06 10:26 PM