Martin Wolf in the FT considers the diverging roles of countries that save versus countries that spend. It sounds like he's saying that we are so out of balance, that the two camps need to reverse roles. Saving countries need to learn how to spend, and spending countries need to learn how to save. Is this possible? Let's see what he says:
"The world has run out of willing and creditworthy private borrowers. The spectacular collapse of the western financial system is a symptom of this big fact. In the short run, governments will replace private sectors as borrowers. But that cannot last for ever. In the long run, the global economy will have to rebalance. If the surplus countries do not expand domestic demand relative to potential output, the open world economy may even break down. As in the 1930s, this is now a real danger."
In the short term, in order to battle this recession, the countries that spend are going to have to spend more. In the long term, this won't work. Why not?
"To understand this, one must understand how the world economy has worked over the past decade. A central role has been played by the emergence of gigantic savings surpluses around the world. In 2008, according to forecasts from the International Monetary Fund, the aggregate excess of savings over investment in surplus countries will be just over $2,000bn (see chart)."
It's pretty clear where we are. That's a very good chart. The savings countries have a lot of savings, while the spending countries have a lot of debt. So what?
"The oil exporters are expected to generate $813bn. Remarkably, a number of oil-importing countries are also expected to generate huge surpluses. Foremost among them are China ($399bn), Germany ($279bn) and Japan ($194bn). As a share of gross domestic product, China’s current account surplus is forecast at an astonishing 9.5 per cent, Germany’s at 7.3 per cent and Japan’s at 4 per cent. In aggregate, the oil exporters, plus these three countries, are forecast to generate 83 per cent of all surpluses.
Surplus countries often enjoy contrasting their prudent selves with the profligacy of others. But it is impossible for some countries to spend less than their incomes if others do not spend more. Lenders need borrowers. Without the latter, the former will go out of business."
Why can't this arrangement between countries predisposed to save and those to spend just keep going? Is seems like the perfect marriage.
"In 2008 the big deficit countries are, in order, the US, Spain, the UK, France, Italy and Australia. The US is far and away the biggest borrower of them all. These six countries are expected to run almost 70 per cent of the world’s deficits. (It should also be noted that the world seems to be running a $350bn surplus with itself.)"
Oddly, I'm, personally, more of a saver. The world seems to be a net saver. Is that good or bad?
"One might argue that Spain, France and Italy merely offset Germany’s surpluses within the eurozone. It is true that the eurozone as a whole is forecast to run a small deficit of $66bn. This does not mean that Germany’s vast surpluses have no global macroeconomic impact. Despite being the world’s second largest economic area, the eurozone makes next to no contribution to offsetting surpluses elsewhere. Furthermore, pressures on the eurozone’s deficit countries are growing. Fiscal crises are at least conceivable in some cases."
I'm not sure why, if balance is the solution, the Eurozone shouldn't be heaven. Why can't the Eurozone be considered a closed system?
"As I have pointed out previously, the most interesting feature of the
global imbalances has been the corresponding pattern of domestic financial imbalances. The sum of net foreign lending (gross savings, less domestic investment) and the government and private sector financial balances (the latter the sum of corporate and household balances) must be zero. In the case of the US, the counterparts of the net foreign lending this decade were, first, mainly fiscal deficits, then government and household deficits equally and, finally, government deficits, again (see chart). During recessions, the private sector retrenches and the government deficit widens. Similar patterns can be seen in other high-income countries, notably the UK. Housing booms helped make huge household deficits possible in the US, the UK, Spain, Australia and other countries."
Is there any reason to read anything else than the FT? I must spend half of my free time reading it.
Anyway, and this should come as no surprise to anyone looking at this crisis through a Human Agency Model, the spending countries are populated by spenders.
"So where are we now? With businesses uninterested in spending more on investment than their retained earnings, and households cutting back, despite easy monetary policy, fiscal deficits are exploding. Even so, deficits have not been large enough to sustain growth in line with potential. So deliberate fiscal boosts are also being undertaken: a small one has just been announced in the UK;
a huge one is coming from the incoming Obama administration."
The spenders have, all of a sudden, become savers. Why isn't that the problem? So, the government must step in and spend for its citizens, since they have changed their spending patterns. That makes sense. In a spending country, someone needs to spend. We'll call it a stimulus, but it's really surrogate spending.
"This then is the endgame for the global imbalances. On the one hand are the surplus countries. On the other are these huge fiscal deficits. So deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses."
We've overspent in the spending countries. Why don't the savings countries just keep lending us more? Surely that's the solution, isn't it? Why don't they just lend us the money on terms that allow us to write these overpriced houses down? Like a savings country TARP for us?
"This is not a durable solution to the challenge of sustaining global demand. Sooner or later – sooner in the case of the UK, later in the case of the US – willingness to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come. To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced, with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first outcome looks not so much unlikely as lethal. So it must be the latter."
I still don't see why we can't keep borrowing. Frankly, why don't the savings countries just give us some money, and we can all keep rolling merrily along? However, he seems to favor the spending countries eventually becoming saver countries. Again, is this possible?
"In normal times, current account surpluses of countries that are either structurally mercantilist – that is, have a chronic excess of output over spending, like Germany and Japan – or follow mercantilist policies – that is, keep exchange rates down through huge foreign currency intervention, like China – are even useful. In a crisis of deficient demand, however, they are dangerously contractionary."
In normal times, they're very useful to the spending countries, since they loan them money to spend. Why have the savings countries stopped lending? If they are not going to save, then they are going to have to spend. That seems clear. Otherwise, the back and forth flow gets all gummed up. If that's true, then it does look like we have a global economy based on savers and spenders, and not just one or the other. That makes sense to me, but maybe not to you.
"Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order."
So the seesaw balancing act is called Sustained Aggregate Demand. Why has the current arrangement been working so well for so long? At least for some people? Or, is that the problem? Who's getting hurt in this crisis? Is that the real crisis?
"In short, if the world economy is to get through
this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."
How about I make this easy. The savers are oil countries and countries that seem to be able to afford oil. How about they buy every citizen in their countries an SUV made in a spender country? Problem solved. The saver countries need to get their citizens to spend. So far, Germany and Japan haven't sounded that excited by that. How can spending not be fun?
"Some argue that an attempt by countries with external deficits to promote export-led growth, via exchange-rate depreciation, is a beggar-my-neighbour policy. This is the reverse of the truth. It is a policy aimed at returning to balance. The beggar-my-neighbour policy is for countries with huge external surpluses to allow a collapse in domestic demand. They are then exporting unemployment. If the countries with massive surpluses allow this to occur they cannot be surprised if deficit countries even resort to protectionist measures."
Given his model, the spending countries now need, somehow, to get the saver countries to buy from them. One way would be for the spending countries' products to become cheaper for customers in the saver countries. Hopefully, then, the savers will start buying from the spenders.
"We are all in the world economy together. Surplus countries must willingly accommodate necessary adjustments by deficit countries. If they decide to sit on the sidelines, while insisting that deficit countries deserve what is happening to them, they must prepare for dire results."
The dire results would be nobody buying anything, I suppose, because everyone has become a saver. I still don't see why we shouldn't find an accommodation that allows the old balance to continue indefinitely.
INFLATION FALLS - STILL MOSTLY ON ENERGY AND COMMODITIES....
BUT IT DOES LOOK LIKE THE ECB IS WAY LATE
THE LANDSLIDE IN UK INDUSTRIAL PRODUCTION CONTINUES
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