Posted on 07/11/2010 7:34:40 AM PDT by TigerLikesRooster
What do banking crises have to do with consumption?
Jul 4th, 2010 by Michael Pettis
Just three days after returning to Beijing from New York, I had to leave again, this time to a series of conferences in Torino, Italy, so it is hard to do much writing for my blog, especially since I won’t spend my free time in the hotel when there is so damned much food out here that urgently needs sampling. Still, I did want to write a hurried note about a topic of conversation that came up a lot while I was in the US and even more here in Italy.
For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital. For reasons I discuss below, this will have a large adverse impact on private consumption.
Let’s go through the major banking systems. First, the crisis started in the US and, perhaps as a consequence, US banks have already identified a lot of their problem loans and have been the most diligent about rebuilding their capital bases. They nonetheless still have a long ways to go, even though a large part of the bad loan problem was directly or indirectly transferred to the US government. By the way, transferring bad loans to the government may be good for the banks but will have the same adverse impact on consumption.
(Excerpt) Read more at mpettis.com ...
P!
Excellent article.
“Astute readers will have noticed that every solution to a banking crisis eventually boils down to the same solution: force households to clean up the banking system, either in the form of explicit taxes or in the form of hidden taxes.”
“...Chinese consumption dropped from a very-low 45% of GDP ten years ago to an astonishing 36% last year just as — no coincidence — Chinese households were forced to clean up the last banking crisis....”
A chinese cab driver told me years ago - “we Chinese are ants. We are the slaves of the Party and the State. Just like ants, we get stepped on.”
There's no peaceful way back from here.
A vice to which I cheerfully confess.
That is correct, Goldman has already bought enough votes to make it so. No cuts in bonuses are expected.
bttt
American consumers have almost $14 TRILLION dollars of privately held debt when you combine residential mortgage debt and other consumer-related debt.
That combined number was less than $1 trillion in 1975.
We did not “pay it forward” as the saying goes, we “CONSUMED it forward”.
Now, we are drowning in worthless stuff piled up all around us and drowning in debt that we owe for that stuff.
In short. We are morbidly obese with debt. To lose weight, we must eat (consume) less and move (work) more.
To make matters infinitely worse, our life rafts, JOBS, have gone overseas (or just over the border) to more business-friendly, export-producing countries.
Until we have jobs, jobs, jobs again… which will help us pay down our debt and eventually get back to a healthy level of consumption/savings, it’s gonna be ugly.
It’s time to stop stuffing our face and start breaking a sweat to work off the fat.
Simple, I know. Actually doing it is another thing altogether.
Heck, they promised us that if we let our jobs go overseas, the stuff on the shelves would be so cheap we’d still be able to buy it.
Do you really need jobs to come out of the Recession or is it Depression....
I thought this recovery was just magic. I'd say black magic but that won't fly in Philly or Chicago.
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