"How will the rest of the world restructure in the face of a United States hell-bent on replenishing its bank accounts?"

Paul Kedrosky on a Savings Spree:

"PAUL KEDROSKY

From Friday's Globe and Mail

January 16, 2009 at 7:23 AM EST

In one of the biggest and most misunderstood changes in modern economic history, citizens of the largest economy in the world are suddenly doing something they haven't done in years: They're saving money. It is having myriad consequences, including a tsunami of money in one part of the world, and an air pocket in demand in other parts of the world, especially China.

Americans are suddenly spending less than they earn. While that might not sound heretical or surprising - how long can you go on spending more money than you earn? - it is an epochal moment for the free-spending United States. After saving an average of more than 7 per cent of disposable income until almost 1990, the United States went into a savings tailspin. Savings rates fell, in fits and starts, from 8 per cent, through 6 per cent in the early 1990s, to 2 per cent around 2000, to the ignominy of a negative savings rate by mid-2005.

Now, however, that is changing rapidly. November economic data showed U.S. savings spiked to 2.8 per cent of disposable income, up from zero at the beginning of 2008. Is it that Americans have suddenly figured out that saving is a good thing, or are they taking some sort of moral stand against profligate spending?

Be serious. Americans remain the wild-eyed spenders of the world, and that was never likely to change without external pressure. They have, however, been forced into this, with their equity investments and real estate investments all sliding into nothingness, and with the economy in a deep recession. They must repair their broken personal balance sheets, and so, as painful as it might be, they are saving money. ( I AGREE )

Great. Good for Americans, right? Savings über alles! Well yes, but there is much more to it than that. For starters, the U.S. savings rate won't stop at 2.8 per cent. My guess is it will rapidly rise to 4 per cent by the end of the year, and will likely hit 7 per cent by late 2010.( I SAY 5% )

But in the end, fixating on those numbers misses everything that matters because that money has to come from somewhere. Your savings, in some sense, represent my lost income. Increased consumer savings is like extending a dam further into a river of money - call it personal income - and diverting some of the flow into a different river. Instead of going into the river called "consumer spending," more of it is going into the river called "savings."( BUT THAT CAN END UP AS INVESTMENT MONEY )

To put it in context, a U.S. savings rate of minus 1 per cent meant roughly $2-million a minute was flowing out of U.S. consumer savings into other things, mostly consumption, like TVs and home renovations, and so on. Or, on an annual basis, that worked out to almost $1.3-trillion exiting the U.S. banking system for other places.

Turn that around, however, and things get very different, very quickly. At a 3-per-cent savings rate, the United States will see $3.8-trillion showing up next year in the banking system just from domestic savers. At 7 per cent, almost $9-trillion will come rushing in as part of the savings tsunami( SPREE ). It is a fire hose of money pointed at the banks, and it's just beginning.

These are ear-popping figures. Three per cent, for example, produces almost five times as much in one-year U.S. capital inflows as the entirety of China's current Treasury holdings. It is four times as much as the proposed Obama stimulus plan. In short, at even relatively small changes, at least in percentage terms, the United States will rapidly transform its banking system and its capital markets.

All that money has to come from somewhere, however, and among the main sources will be the United States' largest trading partners, chief among them China. The U.S. economy is more than three times the size of China, and if you match the U.S. trade deficit against the Chinese trade surplus you'll see that China accounts for, on average, about 60 per cent of the U.S. deficit. As a result, China is going to need to find a way to replace more than 10 per cent of its gross domestic product if the U.S. savings rate returns to its historical norm( THEY REALLY DON'T WANT TO ). Making matters worse is that Chinese consumers are a smaller percentage of GDP than their U.S. counterparts, so to make the math work, Chinese consumers would have to up their buying by something like 25 per cent. Will it happen? No way.( I AGREE )

To be fair, China is not the only country faced with the problem. Similar situations exist in most countries with which the United States has deficits, all of whom are going to see massive export declines as U.S. consumers turn spending into savings. It will be the biggest story of 2009: How will the rest of the world restructure in the face of a United States hell-bent on replenishing its bank accounts( ALLOW US TO DEFAULT OR CONSUME LIKE HELL ) )? In the short run, it can't, which is, in part, why we're seeing the global trade tailspin that we are.

Paul Kedrosky is Senior Fellow at the Kauffman Foundation, and editor of Infectious Greed, a popular financial blog"

Since I see the Savings Spree as a reaction to this crisis, I don't see it lasting. However, I wish it would. We need to save more.