Lost in all of the hype about Europe’s meltdown and America’s ever-bloating deficit is the fact that these have been underwritten by very easy money from the “savers”, i.e. Germany, Japan, and China.
For decades, the “savers”, which have been overwhelmingly export-driven to serve the needs of American consumers, acquired huge sums of foreign reserves and, because they lack their own domestic demand, sent it abroad.
They bought things like U.S. treasuries, Italian bonds, Spanish real estate, and sub-prime mortgage derivatives.
When those investments failed due to political shortcomings, irresponsible- and sometimes- fraudulent bankers, or some other reason, the “savers” lectured the debtors on how immoral we all are.
To listen to the leaders of Germany and China tell it: they are the victims of debt-addicted Americans, Greeks, Portuguese, and others.
It’s hard to be more wrong in one sentence.
The fact remains that the underlying cause of the Great Recession and its aftermath was not too much debt; but too much savings that fueled cheap lending.
As Charles Dumas points out in his compelling book THE AMERICAN PHOENIX, according to data from the IMF, the global savings rate hit its highest level in 2007, with 23.9% of world GDP.
The high savings rate fueled the consumption boom in the U.S. during the period 2001-2007, which spurred global growth. (Remember the American consumer represents 22% of all world GDP).
In 2007, the American consumer quit spending and the savers went over the cliff. GDP losses in Germany and China were far higher than in the U.S.
To make up for this shortfall, governments stepped in and replaced the American consumer as the growth engine of the world economy.
Nevertheless, the savers have continued to save. The IMF predicts global saving will be back to 23.8% this year.
And, if more proof were needed as to how big the current savings glut is, look at how low interest rates are.
Governments around the world have been able to run-up huge deficits- like consumers before them- because there is still so much cheap money out there.
But the moment is at hand where things will change dramatically.
The savers, now unable to export at past levels, will decline precipitously as governments and consumers around the world begin to reduce their debts and spend less.
Did you see what both Germany and China announced this week?
Their manufacturing output is at the lowest level since before the recession. Further, China allowed its banks to cut the amount of required reserves in order to encourage lending. And this is only the beginning…
Because the savers do not possess strong domestic demand, they have fewer places to sell their products. They will have no place to grow.
As American consumers and governments move to get their house in order, the savers are scrambling to hold onto a lost era.
The future will be won in countries where domestic demand is strongest, like the U.S. and Latin America.
The savers' false morality will be their demise.
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