Chris B

Death of the Asian Development Model: Exporters Chasing a Failing Strategy?

The historical average consumer savings rate is 10%. Since the 1980's this rate has declined rapidly. In 2005, we hit negative one percent as consumers took out credit card and home equity debt to buy merchandise - much of it made in China. That was obviously unsustainable. Now the savings rate is back up to 4% and rising.

The baby boomers who were driving so much of that spending find themselves just a few years away from retirement with their 401(k) savings slashed in half (not that they were saving enough even before this crisis!). They face 20-30 years of poverty if they don't save every last penny during their few remaining working years.

The rise of the savings rate from -1% to +4% over the past 3 years was associated with a decline in Asian exports, despite rapidly rising Chinese supply. I suspect that 10% marks the sustainablility point for the consumer savings rate, because savings rates around this number persisted for several decades before the 1980's. At 10%, people are saving just enough for a modest retirement and to handle life's emergencies without going into debt. Consumer savings rates below that point will eventually result in an inability to retire.

Consumers from the baby boomer generation now have a savings and debt emergency on their hands. To an extent, so does generation X. They'll have to kick their savings into high gear to undo the damage of a decade building up debt while saving next to nothing.

The first things on the chopping block will be Asian exports, which tend to be entertainment, electronics, toys, and other discretionary purchases. Food, rent, utilities, clothing, communications, and healthcare, in that order, will be the new priorities. 50" LCD televisions will not.

South Korea and Australia might be OK. South Korea (EWY) exports less discretionary items like cars, ships, and steel. Australia (EWA) exports minerals.