ECONOMY AT RISK
World economic recovery driven by global imbalances
Friday, July 9, 2010
The catastrophic economic downturn that began two years ago was supposed to shake up the global economy, ending an era in which Americans consumed too much and saved and exported too little.
But the recovery is being driven by a return to the very global imbalances that were a major cause of the crisis. Americans' savings rates have fallen over the past year, imports are rising faster than exports, and countries around the world are again turning to Americans to be the consumers of last resort.
"Despite all the good words and good intentions, I'm afraid we're going back to the same conditions that led us into this mess to begin with," said C. Fred Bergsten, director of the Peterson Institute for International Economics.
That's partly because countries around the world view those old ways, while dangerous over the long term, as the quickest option to power out of the deep economic decline. For China, Japan and Germany, that means exporting vast volumes of goods, saving too much and spending too little; for the United States, and to varying degrees Britain and other European nations, it is the reverse.
These trends are deeply ingrained in countries' policies and individual decisions by their citizens, such as the lack of a social safety net in China that causes people to save more and the mortgage-interest deductions in the United States that encourage people to take on more debt.
World leaders have pledged to guide the global economy away from those imbalances. Just this week, President Obama renewed his call for a doubling of U.S. exports. But that has been made more difficult given that the value of the dollar has risen 7.5 percent against other major currencies this year, making American exports more expensive.
Meanwhile, leaders in Germany and Japan have turned their focus to reducing budget deficits, but the rest of the world would benefit if those countries spent more aggressively, increasing their consumption.
The United States has been like a customer who outspends his paycheck by receiving store credit. The store -- in this case, China, which buys vast quantities of U.S. Treasury bonds -- essentially funnels its profit back to the customer in the form of more credit. Everybody is better off for a while; the customer gets more stuff, and the store does more business.
But that relationship can't go on forever. Eventually, the customer owes more money than he can pay, and the whole arrangement collapses. In the years before the financial crisis, it was that risk -- of a collapse in the value of the dollar and of U.S. government securities -- that kept many economists up at night.
Many had concluded that the crisis would shock the system into a fundamental change.
"The growth model that has been in place over the past 10 years -- where excess savers around the world, namely in Asia, allow us to live beyond our means, namely by buying products from those places -- that model is broken, and it's not coming back," Tim Adams, a Treasury Department official in the George W. Bush administration, said in congressional testimony in early 2009.
For a time that prediction seemed to be coming true, as the gap between spending and income narrowed. The U.S. savings rate, which was less than 2 percent of disposable income before the crisis, spiked to 6.4 percent in May 2009, as Americans chose to hoard cash rather than spend it, largely out of fear. But in the year since, spending has risen faster than incomes, and the savings rate has edged back down to 4 percent.