Will Emerging Economies Come to the Rescue of the U.S.?
U.S. Federal Reserve Chariman Ben Bernanke stated lately that the enormous U.S. trade deficit that the U.S. has incurred over the years is nothing to worry about because it merely reflects global savings patterns. He states that emerging economies has a huge glut of savings and thus the U.S. necessarily must have a great debt to balance out the rest of the world’s savings. The logic is, of course, that as the emerging market’s enormous savings glut unwinds, then the U.S. deficit would be reduced significantly. This explanation has a number of gaping holes in it wide enough to drive a Mack truck through. To begin with, although it may seem like emerging economies like Brazil, China, Russia and India rose overnight, it took years and years for these economies to gain the stability and purchasing power parity to final command the world’s attention. During all these years when savings were growing incrementally, why was the United States deficit burgeoning out of control? Furthermore, there are many contributing factors to the enormous U.S. debt such as the war in Iraq and increased military spending, deficit financing, corporate welfare, etc. that have nothing to do with the savings glut of emerging economies. To blame America’s debt solely on the savings glut of emerging economies is delusional. The roots of the problem extend well below this surface level explanation. Furthermore, such analysis of the U.S. trade deficit is through the singular lens of an American perspective without accounting for cultural differences. Asian culture has always been a savings culture. When I was a child, I remember my parents always saving far more than they ever spent every year even though we grew up in the United States. India and China have enormous savings as well because it is a cultural phenomenon with roots hundreds if not thousands of years old, and neither one that Bernanke nor anyone else can change just because they want it to change. Other people have argued that once financial systems and platforms become more sophisticated that the savings glut in Asia will shrink, and that the only thing keeping it so low is the lack of access to good products. I think this is also a bogus rationalization. First of all, the lack of investment opportunities in India hasn’t prevented private individuals from collecting the largest private stash of gold in the world. People invest their money where they see fit according to their history. No one living in India can forget the cycle of enormous run-ups and enormous crashes that their stock markets have endured. It is not likely either that many Indians are going to forget the crash of the Indian stock market earlier this year that wiped out the wealth of many Indians and called for the patrol of armed personnel to guard waterways and prevent financially-devastated men from committing suicide. Furthermore, many emerging countries have seen financial systems collapses triggered by the withdrawal of colonial powers or geopolitical upheaval in their countries and thus are conditioned to store away their assets rather than invest them and risk losing everything. If we look at China, and consider that China saves a ridiculous 50% of its GDP, one may conclude that indeed such a high savings rate is unsustainable. However, it we look at China’s savings rate by household, it is only 16% of GDP. So where is the rest of the savings coming from? The answer is the government and corporate China. The only problem with this equation is that governments such as China and Russia that have huge gluts of savings, due to tenuous relations with the American government, are more likely to turn to world partners other than America to conduct business if at all possible. For example, in a previous post, I mentioned that China has been dumping billions of dollars into Africa as well as Venezuela. Russia, too has been investing considerable money in Venezuela. And much to America’s chagrin, China is on the brink or replacing the U.S. as Japan’s largest trading partner as well. Furthermore, when countries like China have shown interest in spending some of their enormous savings glut in purchasing American assets, Congress has stepped in to block such investments, stating Chinese ownership of American assets is a threat to national security (as in the case with China’s bid to buy American oil company Unocal). This scenario would most likely repeat itself in the event of a similar Russian bid. So while the global economy may very well benefit from the unwinding of the savings glut of emerging markets it is much too presumptuous for U.S. Federal Reserve Chairman Ben Bernanke to assume that emerging economies will come to the rescue of the U.S. economy in the future. This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is. J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn how to build wealth, not just dreams. To learn more at J.S. Kim's blog "The Zen of Investing", click the following link, Learn to Invest Money and Achieve Financial Freedom |
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