Savings Imbalances & the Washington Follies

As I've mention before, these are interesting times we are living through & there is no end to the fascinating tidbits one can find in the press. One of the more valuable series, presumably ongoing, is the New York Times series titled The Reckoning about the economic tumble of the last year or so. And one of my favorites (and more revealing) in the series was a piece that ran the day after Christmas titled Dollar Shift: Chinese Pockets Filled as Americans' Emptied. While I agree with the basic premise -- that Americans, both our government and our households, have been living "high on the hog" through over reliance on debt -- is correct, there are some interesting insights that are left unmentioned. First of all, economists have recognized this problem for years and some, like Morgan Stanley's Stephen Roach, have been been persistent in eloquently & tirelessly telling everyone within earshot that this phenomena would come to a disaster sooner or later. What the Times' article points out is that our erstwhile Secretaries of Treasury in recent years, altho aware of the imbalance, didn't do much effective about it. The prevailing view seems to have been to blame the Chinese and to press the Chinese government to somehow get the Chinese people to increase their spending & decrease their savings. The average Chinese consumer can certainly afford to save less -- the aggregate savings rate in China is generally higher than 30% and sometimes up to 50% of income -- but the Chinese government has little it can do to prod the masses to buy more. For one thing, the vast majority of Chinese people remain poor. Consumption in the cities by the emerging Chinese middle class is a combination of healthy (lots of new cars & a vastly larger private housing market than only a few years ago) and frugal. A visit to those glossy new shopping malls leaves one with the impression that Chinese love to window shop but hate to part with their cash. Or, when they do, its at the shopping areas where you can buy things at sharply lower prices than at the big name shops. Think Prada & Gucci vs. the little clothing stalls on the west side of Beijing; the former are uncrowded and unrushed, while prowling the latter is a contact sport like a rugby scrum. Other big Chinese cities are no different.

One of the proposals out of Washington's policymakers has been for the Chinese government to improve health care funding along with retirement pensions because that's, they think, why the Chinese peple save so much; to save for a rainy day. The irony of suggestions like that from the U.S., where health care funding is famously inadequate and where the U.S.'s Social Security retirement system just barely missed being largely handed over to the thieves of Wall Street, is hard to miss. In any case, it wouldn't have worked. Chinese do not save so much solely out fear that they will end up poor and sick or poor and retired. The entire world-view of traditionally minded Chinese is, apparently, beyond the comprehension of Treasury Dept. policy wonks. Chinese do not generally get into debt to others because they know what so many Americans are only now discovering: getting in debt to the levels common in America means giving up control of your life to someone else; it is inherently risky.

In China, where success is a recent commodity much less taken for granted and failure & poverty are often multi-generational companions, people are much more conservative and tend to see themselves as part of a family continuum of ancestors, extended family and yet-to-be-born descendants. Having family money safely put away is honorable, while getting in debt is both shameful in itself and risks multi-generational ruination. In some parts of America, sefishness and immediate gratification are all-too-common (along with a tendency to blame others for one's failures). The average Chinese, in contrast, is nothing if not self reliant. These are, of course, generalizations. There are many self-reliant Americans who are not mired in a debtor culture just as there are plenty of Chinese who live way beyond their means and are addicted to conspicuous consumption. Nevertheless, the generalizations are useful and are clearly reflected in the aggregate economic data of consumer behavior.

The second insight is the often repeated description of the U.S.'s current Treasury Secretary as someone who is an expert on China. While he appears to have been in China many times in his tenure with Goldman Sachs, he has not been able to accomplish very much in China as Treasury Secretary. While I don't know him at all, I can only speculate that his self-described 70+ trips to China had been directed at senior Chinese from both the government & private sector. His down-time in Beijing, Shanghai and elsewhere was probably with his own employees and with the Chinese government officials, Chinese bankers, and Chinese entrepreneurs that American investment bankers and business leaders visiting China usually seek out. While there's nothing wrong with that at all, it doesn't make you an expert on China. It gives you only a highly choreographed glimpse of a tiny slice of a vast and vastly complex place. Add to that the tendency of Chinese to frequently tell foreigners only what they think those foreigners expect to hear. Stir both up in a pot with the typical Wall Street bankers' "Masters of the Universe" arrogance and you end up with the kind of delusional policy presumptions that have boxed the U.S. in. The one consolation is that the Chinese have as little room to maneuver as the U.S. does.