Michael Pettis has some interesting stuff in his site this week about savings rates, trade and deflation. I am in the early stages of the article, but it occurs to me that I need to write something here on the subject rather than lose it in his comments section. I believe the entire game to be a credit phenonmenon, including the idea of savings, which is nothing more than debt recycled from one account to another and has absolutely nothing to do with substance. i believe in the case of international trade, it actually relates to the credit excess in one country to the detriment of another. I also believe that due to the inconvertiblilty of currencies like the Chinese that savings is done by the central bank and thus there is a curtain drawn between trade and the Chinese currency. Thus all dollars drawn in for investment and trade are impounded to the extent that they aren't needed to buy minerals or other raw materials. The domestic economy has its own market separate from the international accounts. In this matter, a domestic economy could have no debt at all or piles of it, backed on the other side of the equation by savings.
Michael brings up the idea of the Obama administration encouraging savings, which is bordering on absurd. The entire Obama plan is no different than the Bush plan except more obscene on the consumption side. The only consumption he seems to not care for is energy and seems to be leaning toward endowing corporate USA and Wall Street the right to consume energy at the expense of the common every day man. This protest will be for another posting, as it is one of the greatest fascist programs of all time.
Back to savings. If someone can tell me how savings in this world economy can correspond to something besides debt, I would like to learn. This idea is kind of like the money going into the stock market, when anyone with a brain can figure out that money only changes accounts from idiots to smart people. Even if I take $100 and stick it in a matress, it is nothing more than the representation of something owed by the Federal reserve and that something is actually a paradox as it is generally a note in the amount of what I have plus interest due and represents a mathematically impossible equation other than someone taking a haircut. Investing in stocks is nothing more than an exchange of assets and has nothing to do with savings, a real pitfall for those that fool with that market and have no financial training other than what their brokerage companies can give. Speculation is no exchange or investing at all, but instead informed gambling at best.
In any case, housing in China costs about the same as in the US, yet according to what I have read by Andy Xie in Caijing, Chinese incomes are about 1/7th US. I am guessing that the Chinese consumption of housing is roughly 40% of US so the relative cost of housing is about 280% US. They aren't buying this out of their pockets, but are being financed in some fashion. My best guess is the same debt segregation of lending to the industrial so the flow can support the real estate markets that was probably part of the Japan bubble. In some fashion it is all debt.
Depressions last because there is no plan on how to give the haircut on debt and redistribute economic power. As long as there isn't a depression on the horizon it appears that all are left to fend for themselves, but once a crisis is threatened it is unheard of that the owners of Citicorp, Goldman Sachs, Bank of America, UBS, etc. should be replaced and the underlying equity be wiped out and replaced out of the current stock of money. I know the pain that pensioners would go through, but careful examination will reveal that much of this side of the equation has already been looted by Wall Street academic and actuarial formulas that just aren't true over the long term of economic cycles.
There is only one way the Japanese economy fell into the hole it fell into and that was an excess of debt. We heard for years that the Japanese savings rate was 20% to 25% of GDP. Well, what did that mean but the debt rate was also increasing at an amazing rate. Back in the 1980's, I recall the trade deficit with Japan was in the $100 billion range. I don't know about the rest of the world because Japan had to import all its raw materials or at least a very high percentage, but lets say they were even with the rest of the world. In this event, if their GDP was $1.5 trillion, then they were saving about $300 billion, $200 billion domestically. This implies that their debt level against their economy was increasing about 13% annually and their debt level was doubling less than every 6 years against GDP.
The US/China situation is also figured backwards. The situation wasn't fueled by a high China savings rate, but by a run away credit phenonomenon in the US that originated out of the activities of Government sponsored enterprises, namely FNMA, FHLMC and Sallie Mae. Collateralized were home equity and the future value of labor. It was only natural that this excess flowed beyond the US borders given the desperation with which developing countries needed developed world currencies. But, it wasn't the lending back of the money which made this bubble possible. It was only natural that the money was either used to acquire property, minerals or debt from the nation of origin. Had the US government not run deficits, had the GSE's and Wall Street finance not loosened lending standards, the lending back of money would have mattered very little and the trade would have never happened.
If I saved $1000 and loaned it to company A, of course company A would owe me back my savings plus the rent on the money commonly called interest. If Company A then wrote a check to B for $1000 and B saved the money by lending it to Company C, then the same process would occur. There would be $1000 in money in the system and $2000 in savings and debt. If A or C spent that money and cannot get it back, the debt cannot be collected and the savings really doesn't exist. Only the $1000 exists.
Once the gold standard was done away with, money was replaced with debt. The cash in my pocket is backed by the debt on reserve at the Fed, which is payable only in the notes I possess in my pocket along with the other notes in circulation. Interest is due on these notes, so the Fed is always pulling money out of the economy independent of the other activities they employ to keep the system inflated. In any case, this would be the only money that we have independent of the Fed and the sovereign debt. The money created by banking takes on a property sort of like the example in the prior paragraph, in that most of the assets backing the money at any given time are uncollectable. The difference between the bank money and the savings example is that the bank has created the money without any prior savings, instead acting as surety or guarantor of the credit they have extended. When it becomes apparent that the bank can no longer act as surety, the system no longer trusts them and they become like Citicorp and if they are large enough, they create a credit crunch all by themselves. Banks wouldn't lend to each other meant banks wouldn't lend to Citicorp, who had an amazing interbank liability that couldn't be paid. The black hole is still present, it has merely moved from Citicorp to the government which will at some point have no other alternative than to tax the economy and relocate the black hole where it has been all the time, the banking system.
Savings, debt and collateral all serve to create each other. Only in this manner can the Japanese situation be explained. The Japanese answer to the problem was more debt, which in general would be inflationary, but in this case or in the case of maximum payable principal and interest is deflationary. This is what a depression really is, maximum payable principal and interest and the longer the effort to support the money supply goes on, the worse it gets. Irving Fisher was wrong, though his thesis of swelling dollars over the short term was correct. He forgot that the dollars spent a lot of years shrinking. When the result of several business cycles and government solutions to recessions piles up to debt in the amount of several times GDP, then too much has been borrowed out of the future to go on and continue to consider the debt legitimate and the money real in any sense. Like all psychological pain, it is created and made worse by the continued avoidance. No one wants to lose their status quo except the debtors.