Part 2 is here.
In my IPE class this week, we discussed the issue of global imbalances. (If you have no idea what this means, start reading Martin Wolf at the Financial Times.) I argued that it will take awhile to ‘unwind’ them, because Asians have acquired a cultural habit of saving and exporting. Imports are suspect, and a trade surplus has become a downright obsessive national goal out here rather than a natural, occasional imbalance in trade. Now this would be a laudable goal if East Asian states were highly indebted poor states, as in Africa and Latin America, but East Asia is sitting on close to $4 trillion in US debt stocks from two decades of single-minded stockpiling. If China didn’t run a trade surplus in a given year, it would provoke an existential political crisis in the Chinese Communist Party. This is just how deeply mercantilist Asia is. Korea’s trade balance is reported every month in the news, and it is frequently the leading story. The reporter’s spin is always congratulatory and nationalistic. The trade surplus is always reported as a major national-political goal, not a technical economic outcome. In Japan in the last month, the BOJ intervened to keep the yen down at the behest of major exporters, and it is threatening to do so again this week. There is your ‘culture of export.’ East Asians are politically opposed to running trade deficits. Trade surpluses are not economic outcomes; they are nationalistic, highly managed, artificially and purposefully-created political outcomes. This is a massive cultural hurdle to righting the global economy.
Asians desperately want the old system of high exports and high savings to continue, but it can’t because traditional global importers are leveraged to this hilt. But I genuinely believe Asia’s mercantilist elites will put their hands in the sand on this and simply refuse to play ball seriously in the medium-term and so prolong global unemployment. Exporting in Asia is not just a regular economic activity on par with consumption or government spending. Export has acquired a near-mythic status as a mark of national greatness and power. This is wildly mercantilist and unsustainable, but that won’t prevent Asian elites from trying anyway and dragging the globe into a long ‘savings glut’ recession.
In liberal trade theory, current account surpluses are natural outcomes of an unforeseen change in the desirability of a country’s exports. One year, a country’s exports may be suddenly very desirous. Recall that the first Playstation 3s were resold on Ebay for $1000+, so Japan got an export surge. This is ok, because when you exports surge, your currency, if it is floating, should surge too. Your stronger currency reflects that your stuff is in greater demand than you are demanding others’ stuff. The following year, as your stuff becomes more expensive due to your appreciated currency, your net exports over imports, your current account surplus, should recede. Broadly, your imports and exports should tend toward equilibrium, because the world is a closed system. So everybody is happy, because in the long-run, there should be – in fact, mathematically, there must be – equilibrium.
But this healthy process of circulating trade and currency got all gummed up in the last 15 years or so, and this is why the Great Recession is so brutal. In short, East Asia (and Germany) are big net exporters, and the US and peripheral Europe are big importers. If the exporters don’t buy stuff from the importers though – ‘recyle’ the importers’ currency back to them by buying stuff from them – then the importers eventually run out of money. This is ‘natural.’ Previous importers should pendle back to export, and vice versa. But that is not at all what happened.
Instead, running out money didn’t stop the Americans (or the Greeks) in the last decade. When the money ran out, we just borrowed more – and from the exporters. The average American burned through all his savings by around 2005 and went into debt; the US government of course was in debt too. So everyone was borrowing more and more, and Asian states, unwilling to import more, were super-willing to lend their savings back to Americans so that they could keep on buying. (The same thing happened within the euro-zone between the German exporter and the southern European importers.) Hence the ‘imbalance’ – importers piled up more and more debt borrowed from the exporters, and the exporters piled up more and more savings by lending and re-lending their profits back to the importers.
We piled up debt to buy more, while they lent us our own money back to us so we could keep buying. This bizarre, predatory symbiosis is why Ferguson coined the expression ‘Chimerica,’ and its unsustainability has now become evident for all to see. Resembling a ponzi-scheme by 2008, it all collapsed.
The big problem is that if the pre-Great Recession super exporters (above all, China) don’t start spending, not saving their foreign currency, then global consumer demand will collapse, because the erstwhile importers’ demand is much reduced. Indebted and overleveraged, the former consumers are now saving again. The problem is that all that US (particularly) consumption before created global demand which created jobs. Now that US demand has contracted dramatically. Without demand from consumers to buy stuff, companies don’t need as many laborers to make stuff, so they start firing people – unemployment.
So in brief, US demand imploded under debt, but Asians don’t really really want to substitute for that demand. They don’t want to go shopping, or rather their governments don’t want them to go to shopping, because the governments are trapped in a Spanish Habsburg mindset that they MUST run trade surpluses all the time. Getting Asian consumers, especially the Chinese, into the malls is the globe’s best hope for a fast recovery, but the cultural blowback from 40 years telling citizens to save as a national mission is a huge obstacle, as is the Chinese government’s adamant, infuriating refusal to encourage its citizens to shop.
Part 2 will be a case study of Korean mercantilism.
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