Global Rx: China must consume more, U.S. must save more

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FT columnist Martin Wolf is blunt in his most recent analysis of the global recession, and it's research that policy makers in China, Germany and the U.S, as well as investors, would be wise to review.

Essentially, Wolf says, it's 'put up or shut up time' for the nations with large current account surpluses. In particular, he singles out China and Germany, which, although not as complicit as the United States, contributed to the structural imbalances that helped trigger both the financial crisis and the prolonged global recession.
But don't misunderstand: Wolf does not absolve the United States. The U.S., as a result of a near-decade of policy errors, overspent and overborrowed, in both the private and public realms, putting the world's largest economy in its worst debt-servicing condition in more than a generation. Much like the late 1980s, the U.S. went on a foreign-financed consumption binge, among other mistakes, and now the bill is coming due.

This 'bill' will be split

And, like all bills, they have to be paid. But – and here's the attention-getter for policy makers in China – the bill is not entirely the U.S.'s fault, and won't be paid by Americans alone.

Far-fetched? Hardly, economist David H. Wang told DailyFinance Tuesday. Wang said a considerable portion of that shift in income and wealth to China – and the U.S.'s reduced capacity to service its large debt – stems from stagnant wages as a result of job transfers to lower-cost emerging markets, with China at the top of the list. "Some Americans experienced stagnant wages, some experienced a loss of business, and others lost their jobs entirely, and in many cases China and other lower-cost production zones were the winners, and it led to a huge current account surplus and large reserves," Wang said.

Now, like Wolf, Wang agrees that there's nothing wrong with accumulating savings and a current account surplus – China has amassed more than $2 trillion in foreign currency reserves – "but one thing you can not do is a attract jobs and amass wealth, then complain about the debt service ability of the country whose job losses led to the deteriorating credit situation in the first place."

"Essentially, up to now China has wanted to attract lots of U.S.-based jobs, amass large foreign currency reserves, and then also have its dollar-based assets and investments hold value, but those goals contradict," Wang said. "Over time, they are unsustainable."

Further, Wang agreed with Wolf in that China, and to a lesser extent Germany vis-à-vis Europe, will have to help correct global imbalances in a constructive way, or the result will be default, inflation, or both, with losses for U.S. creditors.

The solution? A revived U.S.


And the constructive way to correct the imbalances? Of course: policies that enable the United States to earn its way out of its debt, Wolf argued.

That means a big increase in U.S. exports and an equally large increase in consumption in China. The U.S. will serve as a growth engine during the next global expansion, but very clearly, China's consumers will have to serve as a growth engine, as well, Wang said.

Or, as Wolf put it, China can choose between safe foreign assets or huge surpluses, but it can't have both.

Economic Analysis: It's hard to construct a sustainable global growth model for the next decade that does not include increased China-based consumption. Wang, an economic modeler, doesn't have one in his tool kit. Here's hoping policy makers in Beijing are listening.
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