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According to analysts as diverse as Federal Reserve Chairman Ben Bernanke, Financial Times columnist Martin Wolf, New York Times columnist Paul Krugman, and analysts Sherle Schwenninger and Michael Pettis, the bubble economy of the past generation resulted from the toxic interaction of Asian oversaving and American overborrowing. Since the 1970s, the U.S. has run a chronic trade deficit with Asian export economies, of which the most important have been Japan and China. As Americans splurged on Japanese and more recently Chinese imports, dollars flowed out of the U.S. In a world of falling exchange rates, the result should have been the appreciation of the currencies of Japan and China and the decline of the dollar. Result: Japanese and Chinese imports would have become more expensive for the U.S. consumer, while American exports would have become cheaper for Asian consumers. In a world of floating exchange rates, Asian-U.S. trade would have returned to something like balance, and U.S. interest rates would have been higher, popping the housing bubble at an early stage of inflation.
But this didn't happen. To protect their export industries from becoming less competitive as a result of an increase in their currencies relative to the dollar, Japan and China bought dollar-denominated assets, most notably U.S. Treasury bonds. This in turn lowered interest rates in the U.S., making it easy for affluent speculators and strapped consumers alike to go on a credit-fueled real-estate purchasing spree that came to an end only last September. China and Japan also depressed domestic consumption and wages in order to steer more investment into export-oriented manufacturing. Quantcast
According to the second diagnosis, then, the underlying cause of the crisis was what Ben Bernanke described as a global savings glut. American consumers could have tried to go on a borrowing spree, but they would not have gotten very far but for low interest rates. The Federal Reserve might have wanted to lower interest rates, but might not have had as much success unless it had found Asian governments flush with excess savings that were willing to buy U.S. debt, as part of currency manipulation strategies designed to help their export industries. The point is not to "bash China" nor to excuse debt-intoxicated Americans living champagne lives on beer budgets. The point, rather, is that when you have a drug habit, it's easier to satisfy it when the pusher is lending you the money.
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The basic idea is simple: Rich people have a lower propensity to consume (the term was coined by Keynes) than middle-class and low-income people. It follows that if the gains from productivity growth go to workers, they are more likely to spend the money, stimulating further investment and further growth. But if the gains from productivity growth disproportionately go to the rich, they are less likely to spend the money on mass-produced goods and services than they are to save the money or use it to speculate in assets. The result? Either the economy chokes (too much savings) or explodes (asset bubbles). The underconsumptionist theory is the opposite of trickle-down economics. If it is right, then shifting shares of national income from the majority to the rich minority, far from leading to investment and growth, is likely to lead to speculation and bubbles.
While they hold obvious appeal for liberals and populists, underconsumptionist theories have generally had a disreputable odor of crankiness, particularly in the last generation, when many Democrats as well as Republicans shared a belief in the efficiency and self-correcting nature of free markets. But the underconsumptionists can point to the striking parallels between the 1920s and the crash that followed and the 1990s/2000s and the crash that followed. In both the 1920s and 1990s/2000s productivity both in the U.S. and the world as a whole surged while wages stagnated in an anti-union political climate. In both periods the rich used their increased share of income in part to engage in heroic speculation in assets -- the stock market and Florida real estate in the 1920s, and in recent years ... well, the stock market and Florida real estate. Meanwhile, in both eras middle-class and working-class consumers seeing few or no wage gains turned to debt to finance their consumption, while many of the rich went on their own borrowing and spending sprees, until defaults in one part of the system triggered cascading national and global collapses.
http://www.salon.com/opinion/feature/2009/04/07/economy/index.html
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