January 17, 2011

The Greenspan Misview

"According to Chairman Greenspan, it was the "global savings glut" that led to the large CAD, arguing that if those Asian savers had increased consumption in their own countries instead, especially China, then the US would not have had it growing current account surplus.."

It's NOT correct to think that the Chinese individuals in general have been saving their money under the mattress. Two things here:

1. Most don't even make the kind of money to save significantly. If you talk to a Real Chinese (even with an IT Engineer with a spouse working), you'll be surprised to know that even with double incomes they are putting off having a child because raising a kid is unaffordable in the cost of living they have vis-a-vis their paltry incomes. Industrial workers are in so much worse condition that recently they were committing suicides to escape life. A single software engineer finds it out of his reach to be able to buy and use a car!

These facts are not so obvious until you've actually worked with real Chinese professionals, and have actually worked and spent in China.

2. Those few that do have good incomes haven't exactly stuffed mattresses either. At the exchange rate that Yuan has, the American goods were not value for money, but they bought apartments, at silly prices at that. It will be a mistake to think that they can be now cajoled into buying American products by merely "saving less". They cannot do that because a huge portion of their future incomes has been already committed to making suffocating mortgage payments.

The real cause of the Economic implosion and stalemate is the same phenomenon on both sides of the Pacific: Too much skew in incomes - people at the higher end of the Corporate hierarchies sucking most of the Corporate Revenue, then seeking Govt doles, bailouts and tax breaks in the name of maintaining employment, while actually protecting their rent extraction/ superman price of  'leadership'! flush with personal jets and jewel studded commodes. For the most part, a huge CAD could accumulate because of gargantuan money creation via low Fed rates and allowing financial sector banking leverages like 40:1. Only Add to that, the money flowing in from the few well positioned savers around the World that bought into securitized mortgage paper.

The secondary bottleneck is the dollar-yuan exchange rate that further expensives American goods to the Chinese - the USD converts to twice as many Yuans as PPP conversion would yield.
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