Not long ago, at a conference, I heard a distinguished Democrat of long experience dilating on the theme of saving. Americans, he said, used to save. They knew the value of a dollar, and they knew to keep some for a rainy day. Their incomes and their expectations worked as a team. Then, for no easily identified reason, Americans began to spend beyond their means. Experiencing no penalty for this, they spent even further beyond their means. Others, particularly the Chinese, were willing to sell to them and made money doing so - money that they (unlike Americans) had the good sense to save. Now the U.S. is in a pickle. The only way out is to rediscover the wisdom of our forefathers and start saving.
This charge of generational profligacy, in outline, is hardly new, not least because the narrative of modernity (and much of its attractiveness) is based on indefinite material expansion. My parents had their recollections of pinched times during The War (which is why mom continued to clean and save aluminum foil well into the 1970s), and their parents recalled the Depression all too vividly. Punctually every spring grandma would inform us, in one of her weekly letters, that the time had come again to get out grandpa's "summer trousers." On another occasion, it required hours of coaxing and some trickery to get her to accept a second pair of shoes, "soft" shoes, late in life, when she was finding it painful to walk. Those people saved at a level that would have won the admiration of the flintiest resident of Wuhan.
That has not been the American way for a while. The Fed began tracking household debt in 1952 and it has been growing ever since. In the past few years, the personal savings rate actually dipped below zero. That Democrat was right: something had gone off the rails.
So it was with a certain queasiness that I read the Wall Street Journal page-one headline early last week: "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes." In the third quarter of 2008, the paper reported, household debt actually went down. Goldman Sachs was predicting the personal savings rate for 2009 could be as high as 10 percent.
Why is this, apparently, a disaster, rather than cause for celebration and self-congratulation? The theory is that, in the near term, the American economy needs stimulus, and a critical part of that stimulus should come from consumers. Otherwise the current Mexican standoff - companies cutting back and shedding workers, banks not lending, consumers not spending - will continue.
It makes sense, up to a point. But it isn't as though Americans aren't spending at all. A savings rate of 10 percent will still keep us a bit behind the French and Germans (who don't have our worries about health care and retirement savings), and far behind the Chinese, whose levels are somewhere around 20 or 30 percent (and who have much worse worries than we do about health care and retirement). Besides, the money is not being put under mattresses. It is going into bank accounts and other highly conservative investments. It is available to be lent.
The deeper problem is not consumers' dependence on credit but the American economy's dependence on consumer over-confidence. Consumers can't borrow without lenders. And Americans have for some time had lenders that their parents and grandparents did not have. (I can remember when you had to be pretty darn special to qualify for a Diners' Club card.) Whether these lenders have been "predatory" may be debated but is also something of a distraction. Surely it is obvious by now that the excessive leveraging was a feature of the entire economy, including at the highest levels.
Many have seen this as an indictment of "free-market fundamentalism," and in some ways it is. But it is perilous to lose sight of the role of the state, and in particular the American and Chinese states. It has been American government policy to spend and spend (notably on waging wars), while mostly neglecting the multilateral economic and political negotiations (and domestic tax policies) that might have, so to speak, spread the risk inherent in such extreme deficit spending. At the same time, it has been Chinese policy for the past few years to save: corporations, which are officially guided, saved their revenue rather than distributing it; and official government bodies saved as well. When seen in this broad way, official or quasi-official Chinese savings form a huge share of overall Chinese savings since 2002; and Chinese personal savings rates are themselves understandable in part as a result of official Chinese policy of neglecting individual citizens' welfare.
These official policies, which have kept American inflation down when spending (consumer, government, whatever) might otherwise have fueled it - and which have enabled stable export-led growth in China - have nothing to do with free-market fundamentalism and little enough to do with markets. They represent political decisions to use political tools (principally control of the national currency) to achieve political and economic goals.
The same is true of our various bailouts (American, Chinese, British). Questions are being raised in the West, however, about whether the solution to over-spending is more spending, or whether the solution to private over-leveraging can really be public over-leveraging.
The bond markets have been showing signs of answering no. Corporate bonds have already priced in something like a global meltdown. And it is not clear - the FT had a great piece on this last week - that investors will be willing to buy government bonds on the terms necessary for governments to pursue the stimulus plans they have proposed. The extremely weak response of Britain's banks to official capital infusions is also suggestive: private markets don't really believe the key problem is lack of money.
Obaman policies on infrastructure and education are presumably all to the good, as they aim at increased long-term productivity. The current bank bailouts seem much more questionable. But perhaps the deepest political question is about the currency. It may well be that the U.S. government's hope, if not intent, is to devalue the dollar with as little pain as possible by maximizing foreign ownership of bonds and other dollar-denominated assets. Many commentators believe the dollar has been over-valued for some time. The more the dollar is spread around the globe, the more shared the pain will be of pushing the dollar down to a more sensible level. In this scenario, the spending of, say, a trillion dollars on economic stimulus in the U.S. may not be so terrible in its effects on America's global economic position - as long as enough non-Americans buy the Treasuries. It is hardly a sure thing, however, that the Chinese and others will go along.
The other side of this currency question is demand: the demand, for example, that American consumers are withholding by trying, for the first time in decades, to significantly up their savings. Where will the components of demand come from, then? One guess is that all that pent-up demand in China, which has been one result of Chinese policy, will now have the very beneficial effect (for China) of providing demand for Chinese goods, now that the recession has shrunk demand elsewhere (e.g. in the U.S.).
It isn't hard to see how these trends could lead straight to protectionism and trade wars; right now, I'm having trouble seeing how they won't.
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Over the holidays we failed, for the first time in years, to watch It's a Wonderful Life. The film is, of course, about easy credit. The Jimmy Stewart character wants to give relatively easy credit; Mr. Potter does not. Stewart's repudiation of his responsibility to his town leads straight to the loutish, dime-a-dance, tight-credit hellhole of Potterville. The movie is about public-spirited lending, not frugal saving. I had never thought before of how it unites these themes of nationalism and forgiving lending standards. As usual, our forefathers, on more careful examination, don't look much different from us.