The challenge of using excess overall savings

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“Consumption is the only end and purpose of all production.” This is how Adam Smith taught. It is difficult to see what production is for, now or in the future. Consumption must also be the goal of international trade. But what if significant players don’t seem to believe this? Then the global system works.

The starting point here must be with a fundamental proposal for the economy of John Maynard Keynes: real spending activates possible savings. In addition, he argued, there is no reason to believe that the necessary spending will occur naturally. Called this “the paradox of prosperity“. Maintenance high levels of activity can require political actions.

Today, the excess structural savings of various economies, especially China, Germany and Japan, are compensated largely (and are activated due to excess spending in the world’s most worthy country, the United States (and to a lesser extent, the United Kingdom). The figures are amazing. These three large surplus economies obtained the surplus current account of $ 884 million in $ 2024. Ascend to 1,568 tn. But surplus is only possible for deficits.

But that is also peculiar. Excess savings from surplus countries is not absorbed, as they were found at the end of the 19th century, by investment in emerging and developing dynamic countries. Instead, they are offset by loans for the richest country in the world. In addition, at least since the financial crisis of 2008, the national counterpart of this loan is not the funding of the private sector, but the loan of the Government.

Prior to the 2008 financial crisis, domestic spending had been predominantly driven by credit -fed real estate booms. These phenomena were not unique to the United States, although the largest global borrower has long been the United States. In the euro and the United Kingdom also, the net loans of countries with great current account deficits, before the financial crisis, was largely promoted by bubbles of property -powered property (such as Ireland or Spain) or tax deficits (as in Greece). When the property bubbles exploded and financial systems crashed, the consequence was also huge fiscal deficits almost everywhere.

In short, it now seems that we cannot turn surplus savings in some countries into productive investments elsewhere. One of the reasons for this is that the countries capable of taking care of a sustainable way abroad have credit coins. This rules out the most emerging and developing countries. In addition, he was, in particular, ruled out members of the Euro area deficit. In such a world, it is not surprising that the dominant borrower and Spender are the United States government. But is it a good result of the liberalization of world capital accounts? Barely! It is a huge failure that all these surplus savings are worn in this way, instead of investing in productive activities, especially in poorer countries.

In addition, the countries with deficit are very unhappy with this agreement. Yes, they can spend more than their aggregated income. But they are hardly grateful. No less important, if a country has a great commercial deficit, it will consume more commercial goods and services than it produces, since its residents cannot import non -trade without traveling. Therefore, in the countries of deficit, manufacturing, a central part of the commercial sector, is smaller than in surplus countries, where the opposite is true. This point, made by Beijing Michael Pettis, It helps to explain the North -American Protectionism and the Trump trade war. The latter can be chaotic, in fact irrational, but its origin is not difficult to identify: the manufacture of politically and economically issues.

Unfortunately, the result is not even good for countries with surplus savings: Japan is a prominent case. In order to reduce its surplus current account surplus in the 1980’s, under the pressure of the United States, he pursued ultra-facilian monetary policies, to grow domestic demand. This fed an unsustainable property bubble. When it appeared in 1990, Japan suffered a financial crisis, a weak demand from the private sector, prolonged deflation and a huge fiscal deficit. It has never been recovered. Surprisingly, but not surprising, Japan’s net public debt has exploded, from 63 percent of GDP in 1990 to 255 percent last year.

China, not differently, had to eliminate much of its excess savings after the 2008 financial crisis caused the huge U.S. deficits and Chinese surplus in the early 2000’s to be unsustainable. After 2008, China also led to a huge bubble of property, and credit and investment was fattening. He is now undergoing the consequences, which includes weak domestic demand, low inflation and great tax deficits.

Germany was relatively protected by membership in the euro area. But the financial crisis of the euro area was also a natural result of its huge external surplus. Since then, the euro area has solved its postcris problems, it has become more like Germany: it had previously balanced external accounts. But today, it has also become a significant net exporter of capital.

The biggest problem in Trump’s international economy is that it focuses on a symptom, the United States’s commercial deficit and seeks to eliminate it through wrong and irrational rates. May have been a little less harmful In this week’s “deal” with China and the resulting (perhaps temporary) fall in the bilateral rates. But without macroeconomic rebalancing, the United States trade deficits will be maintained. One necessary condition for this is to reduce U.S. tax deficits, along with policy changes elsewhere, especially China, aimed to reduce excess savings.

Savings is a good thing. But sometimes you can have too much.

martin.wolf@ft.com

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