Global:Saving Backlash (Globalization, China, Dubai Ports - How economy affects national security)

The United States continues to struggle mightily with globalization. China bashing is on the rise in Washington once again, even as the national unemployment rate falls below 5%. There is a political firestorm over a proposed acquisition by Dubai Ports World of a UK operator of five East Coast container terminals in the United States. This backlash and the protectionist debate it has spawned reflect the dangerous mixture of macro and politics. America’s saving shortfall has triggered a classic political blame game. Ever-complacent financial markets could care less.

Notwithstanding the understandable concerns over matters of national security in a post 9/11 world, there is a very simple and extremely powerful macro point that is being overlooked in this debate: America no longer has the internal wherewithal to fund the rapid growth of its economy. Suffering from the greatest domestic saving shortfall in modern history, the US is increasingly dependent on surplus foreign saving to fill the void. The net national saving rate -- the combined saving of individuals, businesses, and the government sector after adjusting for depreciation -- fell into negative territory to the tune of -1.3% of national income in late 2005. That means America doesn’t save enough even to cover the replacement of its worn-out capital stock. This is a first for the US in the modern post-World War II era -- and I believe a first for any hegemonic power over a much longer sweep of world history.

Faced with a shortfall of domestic saving, countries basically have two choices -- to curtail economic growth or borrow from the rest of the world. The first option just doesn’t cut it in the land of abundance. America, in general, and its consumers, in particular, treat rapid economic growth as an entitlement. That leaves the US with little choice other than to pursue the second option -- drawing heavily on the pool of surplus global saving as the means to fund economic growth. Once the US started consuming beyond its means, it left itself beholden to external funding and production. And that’s how China and Dubai have entered America’s macro equation.

That underscores a key attribute of the saving-short, deficit nation: It has no choice other than to run current account deficits in order to attract the requisite foreign capital. And in the case of the United States, where external funding needs are so massive -- now closing in on $800 billion per year -- most of the current account imbalance shows up in the form of a huge trade deficit. In 2005, for example, the trade deficit in goods and services accounted for fully 93% of the total current-account gap.

With that external funding imperative comes key geopolitical tradeoffs. Thank to China, America actually got a rather extraordinary deal for its trade deficit dollar in 2005 -- a net balance of some $200 billion of low-cost, high-quality Chinese goods that expanded the purchasing power of US consumers. If, however, Washington politicians now choose to close down trade with China by imposing high tariffs or forcing a major Chinese currency revaluation -- precisely the tact of a bipartisan coalition headed up by Senators Schumer (D-NY) and Graham (R-SC) -- those actions could well backfire. Absent the China supply line, the trade deficit for a saving-short US economy wouldn’t shrink as the politicians seem to imply. Instead, due to America’s outsize external funding needs, the trade deficit would remain large and merely gravitate to a higher-cost producer -- imposing the functional equivalent of a tax on the American consumer. Similarly, if Washington were to kill the bid by Dubai Ports World, another source of capital inflows would be required to fill the external funding gap. But maybe the next investor would ask for tougher financing terms.

The current political boil raises a critical question: Can the United States select its lenders and dictate the terms of its external financing program? The simple answer to the first part of the question is, “yes” -- targeted protectionism can, indeed, redirect the sources of external commerce. Through tariffs a la Schumer-Graham, or non-tariff restrictions on Dubai-based investors, the US could attempt to shift the mix of its trade and capital inflows. Such actions would do nothing, however, to address the basic problem. America’s trade deficit and concomitant capital surplus will simply shift elsewhere in the world. As long as the US economy is locked on a subpar domestic saving path, it is hooked increasingly on the “kindness of strangers” to provide the sustenance of its economic growth -- both in terms of capital as well as goods.

There’s an even darker side to the recent outbreak of protectionist backlash in the US -- the crass politics of scapegoatting. It’s not hard to figure out why. It stems from the ongoing angst of middle-class American workers -- an undercurrent of discontent that has not been tempered by a sub-5% unemployment rate. A US labor market that was once trapped in a jobless recovery is now mired in a wageless recovery -- an extraordinary stagnation of real wages even in the face of strong productivity growth. At the same time, the US is suffering from a record trade deficit, whose largest bilateral piece is with China. Bingo -- the politicians are quick to point the finger at China as being responsible for the trade-related pressures bearing down on beleaguered US workers.

But who is really to blame in all this? At the end of the day, America’s saving shortfall -- the origin of destabilizing capital and trade flows -- is a by-product of conscious choices made by the US body politic. The Federal budget deficit, which has accounted for the bulk of the plunge in national saving over the past six years, is made in Washington -- not in Beijing. The negative personal saving rate is an outgrowth of pro-consumption tax policies -- again made in Washington. US politicians are the source of resistance to tax reforms, such as a consumption tax, that might address the deficiencies of private saving. Of course, politicians never want to admit that they are the problem. Instead, they prefer to pin the blame on others -- in this case, China and Dubai.

Washington needs to be very careful what it wishes for. In effect, the UAE is being told that it is fine to re-cycle its petro-dollars into Treasuries -- just don’t buy American ports. China is getting the same message -- curtail your exports to the US but don’t dare stop gobbling up dollar-based financial assets. Meanwhile, the United States does next to nothing to address the macro root of the problem -- a staggering shortfall of domestic saving. The longer the US avoids the heavy lifting of fixing its saving shortfall, the greater the risks that America’s current-account funding problem will end in tears. In the end, the answer to the question posed above is “no” -- the US cannot carefully select its lenders as well as dictate the terms of its massive external financing program. The harder the protectionist push, the greater the risks of a financial market backlash that hits the dollar and US real interest rates.

As yes, the savings shortfall again.

The problem is we don't know whether we're saving because we don't have the right measures. The economic data aggregated to calculate national "savings" are old-economy data. If you spend less than you make and put the balance in the bank, that's counted as savings. If you buy bonds or stocks, that's counted as savings. Why? Because these are expected to pay off in the future. But if you pay college tuition, that's counted as consumption even though it will have a higher future return than investments in bonds or a diversified stock portfolio. If the U.S. counted investment in education — or, more broadly, development of knowledge capital — as savings, we'd have a much better idea of where we stood.

Did you read the article and do you know what the article is about.

there is no doubt that americans do not save enough because every statistic shows you that and if you don´t believe in the saving rate or the definition you will have to believe in the current account deficit and the trade deficit.

by the way it does not make a difference for the problem mentioned in the article or the general macroeconomic situation if you "invest" your money in education or if you buy a car or anything else. There is no argument why someone should count spending on education as savings. so if you buy a computer and in fifteen years your kit becomes a second Bill Gates you should better count your computer spending today as savings but also your car because who knows perhaps your kid becomes a second michael schumacher. So believe me your new car is not consumption it is saving and you have a lot to spent with all these savings in you house.

really
So we found a new way of capitalism with never ending growth and increasing private wealth for all of us.

then all americans just have to spent more of their home equity and this will go on forever?

And when they can no longer pay the mortgages they simply sell their houses and will get these huge prices and benefit from their increasing private wealth.

WOW sounds like paradise but even if htis would be true the saving rate would still bne negative and the current account deficit would still be huge and you would still need foreign money from china the middle east and all the other countries.
So the article is still true beside the fact of growing net wealth ( realized or not).

the wealth and also the net wealth in the uS is increasing according to the last statistics. the reasons are (mainly) increasing house values in many parts of the US.

1. What i want to say is that the increasing net wealth does not make the article wrong or change any argument that is used in the article. just the opposite someone could say that the reason for this increasing net wealth is part of the politics mentioned in the article.

2. a different topic would be the question are americans richer now and what would happen to their wealth if they want to realize it.
Your point was that (many) americans do not have to save money because they are richer than they were five, ten .. years ago. That is correct if someone sells the house and realize the gains now. This guy can compare the new price with the price he payed years ago.
The point is many americans stopped saving because of low rates and increasing values of their houses. They refinanced their mortgages payed a little bit back of their credit card debt and bought a little bit on top because of their increasing new wealth or other reasons and so we saw a very healthy growth based on consumption in the US during the last years. But also a negative saving rate a huge trade deficit and a huge current account deficit because many amercicans like japanese cars and chinese clothes toys or whatever ( or if they are a little bit richer and like well designed cars BMW Porsche Audi) .

But nobody believes or better should not believe that this can go on forever. You don´t have to be a fan of these doom scenarios that you can find everywhere or a scientist to realize that this is not a new paradise or a source of endless growth.

...what would happen to their wealth if they want to realize it. Your point was that (many) americans do not have to save money because they are richer... ....nobody believes or better should not believe that this can go on forever.....

What I'm getting from you is that household private assets have value on paper but everyone sells their home then home values will fall. They won't, but even if they did they'd only take a hit with about a third of private wealth ($21 trillion-- the break down came from page 102 of this fed report).

Same with bank deposits ($12 trillion). If everyone spent all their money all on the same day then the money wouldn't be worth as much.

Check out items 23 through 29 -- they're all based on stocks and they total more than homes and deposits combined.

Most companies with stocks are in the service sector. These companies make stuff like software, building designs, songs, invention patents, books, etc. The value of a stock depends on the ability of a company to create products.

So you're right --it can't go on forever. Everyone knows that in about 5 billion years the sun's going to explode and end all life on the planet.

-the article was about the current account deficit the port deal and the consequences for the US and it is or was a good one.

- My point is the question about future grwoth and consumption in the US because you can not only look at one site of the picture. Your argument of net wealth of american households is correct and a good one but also very tricky.
If you look at the numbers you will see that real estate showed the highest increasings with more than 50% within less than four years. The fast grwoing mortgages compared to other times in history indicates the same. Households in the US behaved as they did in the last years not because of their stocks. The increases of the value outperforms the increases of the mortgages. So everything is fine. by the way nearly 70% of the growing net value could be explained with growing real estate prices. To say that would not be fair because soemone must also take the growing liabilities into account.

In the last year the saving rate was negative that means americans already spent more than they earn (in general).
You say (or better i do not know if you say that) this can go on because the net wealth of american household is increasing but not their net wealth will pay for consumption or mortgages it is their income and here we are already negative (saving rate).
So in my opinion it does not need a housing bubble or fast growing rates to bring a lot of americans to a point where they simply can no longer increase their consumption at the same level as we saw it during the last years because that would mean additional growth .
I do not believe in a recession or something like that just slower growth.
Your net wealth will only play a part in this gáme when the debt burden is at a point where the income can no longer pay the mortgages and when a household has to sell their assets hopefully to this higher prices.

If this continue the future would have to be this
- always increasing asset prices
- so that amercians can effort to spent the way they do and have a negative saving rate. But this negative effect will be outperformed by the increasing of their wealth so they can spent more and more. So at some point in the future when their "normal" income can no longer pay for their consumption and growing mortgages it will be payed by their assets that they can always sell at these always increasing prices.

Thanks for going back the article. Steve Roach is a big-tax-Democrat. He hates Bush, he lies about him, and he wants Democrats in power to raise my taxes. Three of his lies are that Bush caused a recession, the recovery was jobless and now the jobs are payless. Roach says the (1) US economy is collapsing, (2) we need Democrats, and (3) higher taxes. From the article:

.
1.	America no longer has the internal wherewithal to fund the rapid growth of its economy.
2.	who is really to blame in all this? ... the US body politic.
3.	targeted protectionism can, indeed, redirect the sources of external commerce.

You say "not their net wealth will pay for consumption or mortgages it is their income". This is a mistake. The increase in total assets is $14 trillion and the increase in mortgages is $3 trillion. Americans are making more money than they spend and they are getting rich.

When Roach says savings is down, he uses numbers from the BEA that are used to calculate the gdp. They say savings is the difference between income and consumption. Net worth numbers come from the Federal Reserve Board. They use the number for deciding interest rates. The savings that the BEA is talking about is different from what Americans do when they want to set money aside and keep it for the future. That's why the BEA savings can be negative, and Americans can be left with more money in their savings accounts at the bank (look at the numbers: they went from $3,267 billion to $4,681 billion in four years and savings bonds in their portfolios ($190 bil. to $204 bil.). The problem is that savings is not the same as savings.

You also said "70% of the growing net value could be explained with growing real estate prices." In the past four years it was only half.

2001

2005

change

real estate	$13,710	$20,778	$7,069
total assets	$48,590	$62,485	$13,896
			51%

This is not my idea, this is what the Fed says. I use the numbers that tell me what is happening with money so I can feed my family. I say Americans are increasing their wealth, this has been going on for a long long time. Roach uses only the numbers that can get people to vote for a Democrat. Nobody has shown that savings, the current account balance, or China can change the fact that we are getting richer, and I will not vote for Mrs. Clinton and her high taxes.

1. I don´t believe that politics has such an huge influence and can be blamed for such development. The people have to decide on their own how to spent their money and what is reasonable not some politicians.

2. The american economy showed and shows solid growth and is healthy. The current account deficit or trade deficit is no problem because there is no sign that foreigners (asians) stop funding that.

3. I am interested in that because of my profession but also because i find it a very interesting situation in the US and a very unique one.

"You say "not their net wealth will pay for consumption or mortgages it is their income". This is a mistake" The increase in total assets is $14 trillion and the increase in mortgages is $3 trillion. Americans are making more money than they spend and they are getting rich."

I make research to develop credit rating systems not especially for private households so i have a different view on this but these numbers ( saving rate or net wealth) are far to general to talk about individual situation and that´s what it is in the end.
There is a difference between income and wealth from asset values and Americans are not making more money than they spend but they are clearly richer according to the numbers we discussed.
So one can say the gains of my assets represents income for me and i can spend it because i am richer now than i was one year ago. But these gains only equals income when they are realized that´s the reason why no company on that planet is allowed to publish unrealized gains and companies sometimes have these huge hidden reserves especially here in germany (but this is changing).

If this person does not want to sell the asset but wants consumption now (negative saving rate) he has to get a loan or mortgages and pays rates on that payed by his "real income".

So we have two main differences he has to pay rates from his income ( let us forget about new exotic forms of loans in the US like reversed mortgages etc that are unknown here) because of his debt and he has the risk of devaluation of his asset. The debt burden of households will play a role here and this number was more or less stable over the last years on a record level but no dramatic increases. That would only change with increasing rates but i doubt the FED wants to sink the american economy.

different economic decisions are often influenced or better can be explained with the help of the risk theory. Different people different predictions of the future and different willingness to take a risk and many amercians are not very risk advers in my opinion.

In the end a interesting topic but a individual problem only if many people are not reasonable there would be a problem.

taxes are also a very interesting topic looking at the situation in many developed countries and their debt because the deficit of today are the taxes for my children and grandchildren. It is good to reduce taxes but in the same way the government has to reduce the spending. They can not present the people the same social security infrastructure or national defence with lower taxes or better while creating huge deficits that someone will have to pay for in the future.
If someone follows Laffer lower taxes are possible and this is a good thing but please without these huge budget deficits.

Excellent post with many strong points!

I don´t believe that politics has such an huge influence... ...The american economy showed and shows solid growth and is healthy

We agree that Stephen Roach was wrong when he said the opposite in the article that started this thread.

We also agree that measuring economic well-being is hard work. You should get paid a lot of money to "develop credit rating systems". Like you said: "the gains of my assets represents income" but "no company on that planet is allowed to publish unrealized gains and companies sometimes have these huge hidden reserves". Besides the problem with hidden reserves there is also the problem of inflated balance sheets where people say they have a house worth a million dollars, but they complain that they can't sell it for what it's worth (home sales dipped 2.8% last month to an annual rate of 6.56 million). The reality is that if nobody wants pay a million dollars for the house, then the house is not worth a million dollars.

The article confused the trade deficit with the budget deficit as if they were the same --they aren't . The article said they're both bad --they aren't. The trade deficit is a capital surplus. In 1960 the US had a trade surplus and a capital deficit so bad that there was high unemployment and gold reserves were lost. The budget deficit is how we manage our cash flow inside the country. Saying that "the deficit of today are the taxes for my children" is not true, it's only half true. The other half if the truth is that wealth of today is an inheritance for the children; so the best way to care for the future generations is to not think about the deficit or the wealth separately, but think about the total. Our total is good and it's getting better.

"You should get paid a lot of money to "develop credit rating systems"

That´s not really true i get paid 50% from a bank and 50% from public funding because my work is at a university but i think about changing because it is the right time to do so but i like my present work and i am very free in my job.

it is mainly statistic work and looking for new variables that better separate "good" from "bad" companies. these variables should help to predict bankruptcy or major problems of companies and should help to reduce the cost for banks with bad loans. Every bank uses these systems and they mainly are based on the same statistic methods using ratios from the balance sheet but now new methods or better new variables are necessary to create better results.

coming back
"The reality is that if nobody wants pay a million dollars for the house, then the house is not worth a million dollars."
That´s the problem when i was a kid i collected stamps and had a book where the prices of these stamps where published and i always thought i make a great deal when i bought stamps on a market because the prices were lower than it was published in my book. At some point i had to learn the difference between realized prices and not realized prices because as you said if nobody wants pay a million dollars for the house, then the house is not worth a million dollars." Now my stamps have no value anymore because nobody collects stamps because it is not modern anymore and this is true for every asset.

Clearly if a society has a huge GDP or a huge amount of wealth the tax base is bigger or could be bigger but the problem is in some ways the same as with individual households. With a growing deficit grows my debt burden because of higher payments to meet my obligations. So i have to increase my income ( taxes; perhaps additional growth) or i have to reduce my spending. otherwise my debt will increase all the time.
But these are very complicated issues my prof at university wrote a book about the justice between generations and how to measure this if someone can measure that at all. A small example future generations will benefit from the infrastructure and other investments and so it could be fair to say that they have to pay their part of these investments.

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