We are all used to self-denying exhortation. Eat less to escape obesity. Save more for future prosperity. Drink less for all the well-known reasons. Give away more of your income to help the poor at home or increase overseas aid. And so on. What is relatively novel is the exhortation to indulge oneself and consume more for the sake of the world economy.
Yet that is the conventional remedy pushed on countries such as China, Germany and Japan to rescue the world from the threat of renewed depressed economic conditions, which in turn could produce a protectionist backlash.
These reflections have come to me partly as a reaction to the analysis of world economic problems by Charles Dumas in his book Globalisation Fractures. The diagnosis is one of the best I have seen of the current malaise. It is far better than the conventional analysis in terms of the technicalities of bank regulation. The existence of a world savings glut depressed world interest rates and stimulated a "search for yield”, which led to the acceptance by banks of dubious lending projects and the proliferation of questionable derivatives. The savings surpluses of countries such as China indirectly financed a US consumer boom and also supported consumption in other western countries. But consumer debt ratios could not go on rising for ever; and had it not been the US subprime crisis, some other trigger would have set off the recession.
With world real interest rates down to zero or less, monetary policy cannot be relied upon to produce an enduring recovery. The existence of savings intentions well above perceived investment opportunities was of course Lord Keynes’s explanation of the malaise of the 1930s. This seemed to have been disproved in most of the postwar decades, when in many countries the problem was one of under-saving and inflationary pressure. But the Keynesian problem has come back on a world scale as a result of what Dumas calls "the Eurasian savings glut”.
He believes that a healthy world recovery depends, first, on measures to ensure rapid consumption growth in the savings glut countries; and second, on improving the flow of excess savings to "optimal investment in the rest of the world”.
The first route is probably closed off, as Dumas concedes. In Germany at least, the spend-more advice goes against the grain. I do not know how far this attitude is a deep-seated national habit and how far it is a continuing reaction to Weimar hyperinflation. I still remember a German-Polish refugee woman in postwar London who would take a bus from Cricklewood Broadway to Kilburn High St to save a few pence on some turnips, in the process probably spending more on fares than she gained on the turnip price. It is surely better to find ways of living with such habits than to inveigh against them.
The hopelessness of tying together German-led central European countries with the Club Med ones is brought out by Dumas’s chapter heading "The Euro-catastrophe”, which says it all, although I would expect the experiment to be brought to an end by the Club Med countries dropping off rather than the German bloc breaking loose.
There is a third route to lasting world recovery, mentioned but not particularly endorsed by Dumas. This is to accept long-lasting structural budget deficits in the US and some other western countries as the counterpart to the surpluses of the savings glut countries. There is incidentally no need to finance such deficits by market borrowing. That well-known leftwing radical Milton Friedman suggested in his Framework for Economic Stability that deficits incurred for stabilisation purposes should be financed by newly created Fed dollars.
Of the Dumas suggestions, there is more mileage to be obtained from his second one, appropriate redirection of the surpluses of savings glut countries. The Chinese authorities are becoming restive at piling up ever more enormous dollar reserves. But US and European governments are obviously unhappy at the alternative of ever-growing Chinese physical investment in key western industries. What is needed is some outlet that will allow Chinese excess reserves to be spent rather than hoarded. I have previously suggested a revival of an old Max Stamp plan of new issues of IMF special drawing rights to developing world countries and there must be other ideas.
The Scottish philosopher David Hume once wrote: "All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.” Perhaps we should have an alternative rendering, substituting "in the behaviour of countries”. Or, in modern economic jargon, we
could regard Chinese economic policy as "exogenous”.
At times of national emergency, exhortations to "carry on spending” might make sense. But in general, saving and spending decisions should be made by individuals in their own interests and not in the supposed interests of the world economy.
Copyright The Financial Times Limited 2010.