29 Nov 2008
RGE on Credit and Trade
Roubini Global Economics (RGE) has an interesting article called “Can China Adjust to the US Adjustment” that discusses, among other things, the relationship between foreign trade and the current credit ‘crunch.’ It’s a fascinating article both because of the interesting history it describes, and some of the predictions it makes.
Although we can’t say for sure, it is probably safe to argue that US savings rates will climb back to earlier average levels, or even temporarily exceed those levels, as American households rebuild their shattered balance sheets. If they return only to the mid-point of earlier savings rates, this implies that US household savings must rise by some amount equal to roughly 5% of US GDP, or, to put it another way, that all other things being equal US household consumption must decline by that amount.
Although it may just be that I haven’t been paying close enough attention, this is the first time I’ve seen anyone toss out a hard number estimate of how much they expect consumption to fall by. Pretty much everyone expects consumption to fall by some amount, but ‘how much’ is the real issue.
This decline – whatever it ends up being – will inevitably cause a decrease in China-to-U.S. imports, and that will have to be compensated by either an increase in domestic Chinese consumption, or a decrease in production. The article suggests, and I agree, that the former is highly unlikely. Although Chinese household spending is on the rise, there is just no way that it will rise fast enough or high enough to maintain the insane level of consumption that was until recently being bankrolled by the U.S. Hence, production there must fall.
Of course, falling production means factory closures and job loss, and that means domestic consumption will fall yet further, leading to a nasty downward spiral. The parallels drawn in the article between 1929 in the U.S. and 2008 in China seem pretty well-grounded; except, of course, that in 2008 Chinese regulators have volumes of economic theory and analysis written about 1929 at their disposal, if they choose to make use of it.
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