THE OUTLOOK: "Imbalance in Nations' Savings Clouds Forecasts for Recovery," by Mark Whitehouse, Wall Street Journal, 23 March 2009.
The "vast disparity in the way big nations save" is at the root of this crisis: our transaction strategy with Asia and with China in particular over the past decade or so means their savings approach keeps our economy flooded with extremely cheap money.
That distortion, while useful in aiding Asia's rise, has gone as far as it can go.
The way ahead amounts to restructuring global trade to an extent--no two ways about it.
You can blame the "profligate West," but it takes two to tango:
In recent weeks, a growing chorus of prominent economists--including U.S. Federal Reserve Chairman Ben Bernanke and Bank of England Gov. Mervyn King--have pointed out that it took more than greedy bankers, profligate American consumers and law regulation to generate a crisis of global proportions. While all those factors played important roles, they say, the conditions were created in part by China and other Asian nations, which over a decade of export-led growth socked away trillions of dollars in the form of foreign-currency reserves. Their efforts to invest those savings flooded Western financial markets with cash, making it cheaper to borrow at a time when people in places like the U.S. and the U.K. were building up debts at an alarming rate.
The huge machine of subprime-mortgage lending that triggered the crisis, the logic goes, was just one of the many ways bankers took advantage of these so-called "global imbalances" by putting savers and borrowers together.
This is an argument of mine going back to the original PNM brief/book (the "living large" segment of the "global transaction strategy" section), my point to the national security crowd being that we can only afford this Leviathan if Asia continues to pay for it by keeping our debt so damn cheap. I gave that sequence in the brief for years, to virtually no feedback. And so I stopped giving it. A revised and updated version now fronts my current brief.
No, I have never made any pretense of predicting the tipping point, or the triggers. But conversely, when I get these emails saying, "Confess! You did not imagine this coming!" I'm always a big amused.
Clearly, what we had going worked for an awfully long time, as a 27-year global boom is nothing to shake a stick at. But when it could not work anymore, it stopped, and now we have to adjust.
Wow! Who could have imagined that? You do one thing one way for years and it works like a charm and suddenly it stops and so you have to go in a new way! That's just so odd in terms of human history and markets in general. Almost like a complete repudiation of capitalism, Reagan's deregulation and a total victory for socialism!
You know . . . sort of.
Or maybe now we simply have to tack into a different wind for a while.
Make no mistake: fixing this imbalance won't happen overnight, but flows must be changed (we save more and spend less, and Asia spends more and saves less)--typically on the same generational scale that got us quite nicely to this point.
The final warning here is right out of Great Powers: Make sure your fix this time doesn't set in motion the next crisis way down the road.
Please.
Every fix does that to a certain extent. That's the nature of markets.
If a bunch of guys sitting around a table could do it better, then the USSR would still be around.
If you want the surface version of this analysis, see David Brooks with his "stupidity and greed" bit (3 April). It's simplistic and diversionary in the following sense: we won't be getting rid of greed and stupidity any time soon either, and no matter how much we try, it's the structural imbalance that created/creates the underlying enabling conditions, so a focus on changing human character is a cute bit for op-ed columnists to push, but it's essentially meaningless.
Tuesday, April 7, 2009 at 3:38AM 
