UPDATE #2: Today, Robert Samuelson has a column that discusses the crisis and which makes a couple of the points I’ve been making.
Traumatized by plunging home values and stock prices — which have shaved at least $7 trillion from personal wealth — they’ve curbed spending and increased saving.
I’ve made the point that we have been criticized for our low savings rate but the world has, at the same time, been dependent on us to drive the economy, especially for the Asian export economies.
High-saving Asian countries have relied on export-led growth that, in turn, has required American consumers to spend ever-larger shares of their incomes. Huge trade imbalances have resulted: U.S. deficits, Asian surpluses. As Americans cut spending, this pattern is no longer sustainable. Asia is tumbling into recession.
There is even a theory that the entire bubble is a consequence of China’s manipulation of its currency, funneling huge surpluses into the US capital markets.
Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
Did the US demand simply draw all that investment money ? Is it our fault ?
If Americans’ insatiable appetite for loans explained the flood of Chinese capital into the United States, we would have seen the evidence in a rising price for those loans — that is, higher interest rates in the bond market. But bond rates were strikingly low at mid-decade. This strongly suggests that it was the supply of lending that went up, not the demand for it. Chinese money flooded into the United States because of the push factor from China, not the pull factor from Americans.
Interesting theory and it seems to be the policy of the new Treasury Secretary.
Hmmmm.
UPDATE: Here is a Bruce Bartlett piece on the stimulus package and the economy that seems to me to be a good summary of the history of economic slumps since 1929.
The Weimar Republic ended in a hyperinflation that radicalized the German middle class and led the way for Hitler. Some of that was deliberate as the Germans decided to inflate their currency to wipe out war reparations. That couldn’t happen here, could it ? Look at this graph.
Look at that chart. It is the US money supply. Look at the curve, then look at 2008. Yes, that is a vertical straight line. It looks like Weimar Germany to me.
Scary.
I recall in my early high school days a friend over dosed on a medication. I asked him what happened. He said, ” I figured if a little did a little good, a lot would do a lot of good.” That friend must be in charge of the money supply today.
I keep hearing this won’t happen because wages aren’t going up. Then I hear we will continue in a deflationary period for a spell and then hyperinflation will kick in with a vengeance. All I want to know is if diversifying out into stocks from cash will blunt the effect.
Could it be that the banks are simply soaking up this money to stay “solvent”?
I’ve heard the same thing, Cassandra.
The destruction of credit exceeds the various government stimuli. Add to that the cratering of home prices and trillions of dollars of buying power has disappeared. So if we are to experience hyperinflation the government will really have to step up the printing presses. It could happen, but right now deflation is more likely.
I think the inflation effect will come after recovery. Preventing recovery by major errors in policy, like Roosevelt did, will delay the inflationary consequences. My point is that new money is being created. At the same time, the government is borrowing huge amounts and spending it. It’s possible they may cancel but, if we have an economic recovery, that new money will still be out there.
I think there is growing evidence that the Fed is the culprit in the Depression and I added the Bartlett piece to explain that. I think the Fed is the culprit here.
Bradley, one thing we are seeing here is the change from consumption to saving and paying off debt. It is ironic that our economy seems to be so dependent on spending.
Not ironic, Dr. Capt., planned.
For decades, it’s been economic orthodoxy that the consumer’s greatest patriotic duty is to spend, spend, spend, with a perfunctory nod to savings and paying off debt.
The virtues of thrift and self-reliance were pooh-poohed by economists educated beyond their intelligence. Now we are relearning those classic virtues.
The trend you mentioned has been pegged as as “The New Austerity.”
So far most of the created money has gone to shore up banks who’s assets (loan portfolios) have sharply deteriorated from the drop in home prices. It’s amazing what a decrease of trillions in assets produces. It’s also highly nonlinear. The last trillion in property values destroys far more than the first trillion.
Not putting the money in wasn’t an option. The impact of banks failing and suddenly having large employers seeing their cash deposits disappear with the consequence of unpaid workers and vendors produces a feedback loop with no bottom. Still to come are large scale business failures as people divert nonessentials such as Starbucks bucks to debt reduction.
Assuming the government can halt the downturn and that’s not a given, the task of managing the upturn without having all the pumped in money drive inflation will be a thankless job. I think the US should float as much long term debt as possible at the current interest rates. It will provide cushion during the recovery. It’s an option California no longer has. Absent federal bailout, California will face bk.
I think what they call “saving” is just “can’t borrow any more.”
A lot are paying down debt and that is the same as saving.
A lot is paying down debt and that is the same as saving.
Yes, and more prudent too. At least so long as one has a bit of cash for emergencies.
Then there are frugal types like me who have forgone the flat screens, ipods, home theaters, ect. and now with no debt except for a mortgage I’m ready to pounce and spend on some of these items that are dropping in price. Especially with refinancing my already sub 6% fixed rate mortgage to a sub 5% fixed rate mortgage I’ll have an extra 3 or $400 a month to spend on items I’ve post poned buying. Even a new car is enticing at 0% interest although I hate car payments.
The cause of our financial crises is the exponential growth of fraud in the financial system since 1900