|
![]()
US
consumers are in better shape than they were before the 2008 crisis,
but we are nowhere near double-digit savings rates © Bloomberg
America
regularly consumes more than it produces. That’s simply how our economy
has been designed to work over the past half century. Part of this is
about the power of the dollar in the global economy, which allows us to
borrow more than we should. Part of it is about policy decisions made to
prioritise the service sector over manufacturing (and the trade
ramifications of that, which I cover in my latest column).
All of it has been facilitated by the rise of dollar denominated assets
over a long period of time. But as Swamp Notes readers will know, I
believe that this era will eventually come to an end, as the financialisation of the US economy collides with the rise of China.
Michael Pettis, along with Matthew Klein, have written eloquently about how the dysfunctional trade and currency relationship between the US and China will eventually break in their book Trade Wars Are Class Wars.
As they put it, China’s not to blame for America’s problems (or visa
versa), but rather imbalances within the countries themselves that have
created tension. Despite recent gains, China still doesn’t consume enough,
Pettis pointed out in his recent FT opinion piece, which is one reason
the country just reported its largest trade surplus in history.
China’s
dual economy and common prosperity efforts are in part about changing
that, creating a more equal balance of consumption and local production
for the Chinese themselves, as well as the countries along the “One
Belt, One Road” pathway that are in their economic orbit. I think this
sort of economic regionalisation makes sense for many reasons, from
economic to environmental. When there’s a price on carbon, long supply
chains simply don’t make as much sense.
As I argued in this column,
there are many lessons that the US can take from China’s efforts around
debt reduction, corporate governance and inequality. The problem is
that we don’t have anywhere near the long-term view about our economy
that China has about its own. This has led us to a deeply dysfunctional
place in which central bankers are propping up the economy with monetary
policy alone. This has raised asset prices, but also encouraged
overconsumption and inequality (for more on that, read Christopher
Leonard’s book The Lords of Easy Money, which tracks former Kansas City Federal Reserve chief Thomas Hoenig, a rare and thoughtful Cassandra of easy money.
Watching
the ups and downs of the market in recent weeks, I’ve become more
preoccupied with the problem of how we get off the easy money train
without a recession or even a depression. I had a catch-up conversation
with Hoenig last week to discuss the topic. Like me, he wishes the Fed
would have tightened a long time ago. Now, we both worry that tightening
into a slowdown will mean higher unemployment, and also rock markets in
ways that will become a big headwind to growth. This is actually the
fundamental issue. We’ve become so dependent on asset price increases
that we may not be able to grow strongly, at least in the short term,
without them.
So
where does this leave us? “I think over the next year, we are going to
see-saw towards higher inflation,” Hoenig said, with the Fed possibly
having to move back and forth on tightening depending on what happens in
the market. Longer term, he says, “we must encourage more savings”, as
well as domestic production, to rebalance the economy. But Americans
aren’t used to this kind of austerity. As I wrote back in April 2020, the last time American savings rates went up significantly from nearly zero was back in the 1930s and 1940s.
Consumers
are certainly in better shape than they were before the 2008 crisis.
But we are nowhere near double-digit savings rates. And yet, as this
McKinsey Global Institute study shows, of the 45 episodes of
deleveraging in mature economies since 1930, half involved sustained periods of austerity.
Of
course, if we save, interest rates have to go up. Consumption has to go
down. Ultimately, production must increase. This is a wholesale change
in the economy of the sort that the Biden administration has tried to
articulate in some ways, by encouraging domestic manufacturing and more
training to raise wages and productivity together. But it’s not a quick
shift, and even if it can be done, it requires central bankers and
policymakers working hand in hand, over a long period of time. It also
may lead to painful dollar market corrections in the short term.
I
don’t want to say that America doesn’t have the capacity to do this,
because frankly, I’m sick of that kind of easy, boring defeatism, from
pundits in particular. But it does seem to call for another Paul
Volcker-type personality at the Fed, and a president who can articulate
the painful truth — that our half-century party of financialisation is
coming to an end, and we have harder years ahead of us to get to a
better place.
Ed,
how does a political leader even articulate a message like this today?
When was the last time you heard a political figure in any country
articulate a hard truth, and then act on it in a way that made things
better? As you can see, I’m desperately looking for some illustrative
lessons from history here and invite not only Ed, but readers, to submit
them. |