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In a review of Martin Wolf's book, Fixing Global Finance, one observer (Wayne Yang) suggested that Professor Wolf was wrong to pay so much attention to China's / Asia's 'savings glut'.
Both Professor Wolf's book and the above review seem to suffer from the same limitation - a failure to consider the way in which the economic models that have been the basis of rapid development and growth in East Asia depend critically on maintaining 'excess savings' (see Understanding East Asia's Economic Models).
Those models, which appear to involve coordination of economic activities through social relationships amongst nationalistic elites rather than profit-seeking by enterprises, tend to generate poor balance sheets in financial institutions. The latter can only avoid crises if protected from the need to borrow in international markets by the cash flow associated with a large current account surplus.
On this basis it is also suggested that:
In Fixing Global Finance, Martin Wolf (the must-read Financial Times columnist) argues that China and the emerging markets have hoisted a "global savings glut" onto the United States. China's savings, as measured against its gross domestic product, have reached an unhealthy level, it is generating too much excess capacity and the country needs to encourage its people to consume more. The country is in the odd historical position where it is both the world's fastest growing economy and its largest exporter of capital.
That strange status stems in part from the tack that China took after the Asian currency crisis of 1997. China saw the crushing speed with which "fast money" (speculative foreign investment dollars) left the Southeast Asian economies, bursting the region's market bubble. Putting that experience in the rearview, the Asian economies, and subsequently, an emerging China, decided that the best way to defend against such financial fickleness was to build overwhelming foreign reserves. To Wolf's mind, China drew the wrong conclusions from the Asian economic crisis, however. Though China started from a lower baseline, the restarting of its large economic engine has distorted the global economy as it has accumulated and recycled a torrent of U.S. dollars back into the United States. Wolf says that China is much too large to follow the model of smaller economies like that of Korea and Taiwan.
In his critique of China's role in the global economic imbalances, Wolf seems to largely absolve the United States. He criticizes Richard Duncan and other writers for believing that our problems stem from a "money glut", a position that essentially paints China and the other emerging markets as passive victims of U.S. dollar "hegemony". According to Wolf, monetary growth until fairly recently was considered to be contained (a debatable point, depending on what measure of monetary growth you use) and inflationary expectations have remained muted (suffice it to say that the verdict on that score is still out). The United States, in the short-term at least, still benefits from the perverse idea that U.S. Treasuries are a safe investment, even though the country is leveraged to the hilt. Wolf admits that the money glut thesis is not without merit, since "American policy makers had at least some influence on whether the counterpart of the inflow would be consumption or investment." True, he admits that the United States has an "exorbitant privilege" in being able to issue debt in its own currency, the world's de facto reserve currency, but he readily buys the idea that the United States acts as a good citizen in accepting and recycling surplus dollars, a dynamic, which in reality has helped birth the many asset bubbles that we have experienced in recent decades.
The U.S. Federal Reserve does not accept and carry out its role out of any great largesse for the rest of the world; the overly protracted, loose credit policy that it effected during the early part of the decade was a self-protective response to the bursting of a U.S. stock market bubble, and subsequently helped to create a new bubble in U.S. real estate. If it also helped to re-stimulate various export-oriented economies, it was at the cost of further propping up Pax Americana, the myth that U.S. assets and financial instruments were worth more because the evermore deeply-in-debt American consumer was somehow the engine of growth for the world. The global stock market collapse in 2008 should have shattered that illusion. The United States has chosen to be a borrower; China, a lender.
The misfortune is that Wolf's book has come out before this crisis has run its full course. Despite the arguments of raging bulls, who have been fueled by a too-quick return in stock market values, we still face the prospect of rising U.S. unemployment, an exploding amount of U.S. government debt, a weakening U.S. dollar, and the specter of rampant inflation. Charles Kindleberger warned that when a government faces the hard choice of asking its citizens to sacrifice and strengthen the country's financial position or to debase the currency, governments seem to inevitably choose to debase the currency. In the same way that Rome once debased the precious metals contents of its coins, the United States and Western Europe have begun running its printing presses at a lightning clip. Brazil, Russia, India and China -- the so-called "BRIC" nations -- have begun expressing more concern over the U.S. dollar. China, in particular, has been trenchant in its criticism of the United States' exploding debt.
Wolf's real mission in Fixing Global Finance, however, is not to assign blame but to highlight the alarming economic imbalance. His proposals include growing the still nascent bond markets of the emerging markets and issuing bonds denominated in emerging markets currency baskets. The mid-year purchase of International Monetary Fund (IMF), special drawing right (SDR)-denominated bonds by the BRIC nations was relatively small, but in a sense, it was a warning shot across the bow of the developed world.
If, as Wolf says, "the essential role of government is to supply the institutions that create and sustain trust in financial promises," the profligacy of the United States is irresponsible, given its key role in the global economy. What we all fear is that a day of reckoning could be coming. "Sophisticated and dynamic modern economies depend on pyramids or promises far more impressive and complex than those of stone constructed by the pharaohs almost five thousand years ago," writes Wolf. "Yet the confidence that sustains them could all too easily prove misplaced. People would then end up with promises not worth the paper they are no longer printed on."
-- Wayne E. Yang lives and works in New York. His writing has appeared in The North American Review, The Christian Science Monitor, Dim Sum and other publications.