Wednesday, May 9, 2007

The Negative Effects Of A Negative Saving Rate
..and The 19th Century Sick Man of Europe

For the past 24 months in a row Americans have been spending more than their disposable income, resulting in negative saving. Personal saving in current dollars peaked in 1992 at $362 billion/yr and is now running at a negative -$102 billion/yr.

What does this mean, in practical terms?

Spending above the rate of disposable income growth must - by definition - be funded through selling assets and/or added borrowing. This means that, on average, someone other than Americans must provide the extra money to buy the assets and/or fund the increased debt service. The result can be clearly seen in the rapidly rising amount of US securities held by foreigners. Of the 2006 total $7.8 trillion, approx. 70% was debt and 30% equities.

Another interesting aspect is who has been buying all those American securities, particularly US Government debt. Between June 2006 and February 2007, foreign ownership of US Treasurys increased by $163.6 billion reaching a total of $2.141 trillion. Of that increase, 39% came from the UK, 32% from China (incl. HK), 17% from Brazil, 4.5% from Canada, 4% from India and 3.5% from Turkey.

That's a very interesting change: countries formerly known as "third world" or "developing" are now increasingly funding the US consumer, instead of the other way around. The "normal" course of mercantilist events is for an economically powerful country ABC to lend money to the weaker XYZ, so that XYZ's consumers can buy imported goods manufactured by ABC, which thus profits from both its industrial and financial capital bases. This was the British Empire model and the US copied it very successfully after WWII, despite all the Cold War issues that frequently disguised mercantilism as ideology.

The tables are now turned and the US is increasingly dependent on "the kindness of strangers" to maintain its living standards. Surely, not a sign of economic prowess. Indeed, the current situation reminds me somewhat of the late-19th century Ottoman Empire, known then as "the sick man of Europe". Despite its former glory and power, it got caught between a number of costly wars and a weak, corrupt domestic fiscal system (low tax receipts vs. expenses) and became highly dependent on foreign loans. Vast fortunes were made by some very sharp bank operators in Istanbul, Paris, London, Vienna and Berlin who bought Ottoman bills and bonds at deep wholesale discounts and retailed them to investors and speculators throughout Europe.

This is not unlike the current securitization scheme: domestic loans of highly dubious quality are sliced and packaged into "retail-ready" bonds, resulting in huge mark-ups and fees for today's sharp operators, foreign and domestic. Plus ca change, plus c'est la meme chose...but I sincerely hope for everyone's sake that the US debt does not end up as fancy wallpaper or framed reminders of investment folly.


  1. What makes it all possible is the dollars reserve currency status. We get to borrow in dollars. Increased dollars and our weak economy devalue the dollar, and our debts. Meanwhile, our foreign assets and repatriated profits are worth more.

    Brilliant system.

    Jason B

  2. Until someone (and somewhere) that matters, stops accepting dollars and dollar hegemony is no more.

    Let's face it, if another country had the same fiscal and monetary numbers that the US has now the IMF would be all over it dictating that it changes its ways or else...

  3. Yeah - but the someones and somewhere's that matter all have tons of dollars. They would be slitting their own throats to dump them. It will have to be a long, gradual, planned sell off.

    Jason B

  4. Something that Michael Hudson noted in his book, "Super Imperialism":

    "In sum, the United States is able to rule not through its position as world creditor, but as world debtor. Rather than being the world banker, it makes all other countries the lenders to itself. Thus rather than its debtor position being an element of weakness, America’s seeming weakness has become the foundation of the world’s monetary and financial system. To change this system in a way adverse to the United States would bring down the system’s creditors to America." (386)

    Which, you know, really came into effect post Bretton Woods and, in my opinion, cannot be limitless.

    Might also mention that, per Brad Setser, the UK intermediates substantial flows from the oil exporting nations, i.e. not all of that 39% should be considered to be of Brit origin.