For the past eight years along, Americans have not only spent their own 20% share of world GDP, they have also borrowed another 60% of their own GDP to spend. The mammoth spending was feeding both their 300 million population economy and 2.5 billion people’s economy on the other side of pacific. The ensuing worldwide prosperity blinded everyone of the potential risk of high financial leverage (let alone the deceptive derivatives) in both private and public sectors until the subprime crisis effortlessly pierced through euphoria. When the 14 trillion American gorilla turned anemic and stopped spending, the investors startled with their jaws wide open and looked in disbelief as all major indexes plummeted. In Warren Buffet’s words, the economic meltdown is going to be an ugly time to see who were swimming naked. The recession and the fear for recession multiplied by potential protectionist tariff and subsidy are forcing countries to seek four leaves-clovers from their domestic consumers.
Sooner than the Christmas sales result settled in, the market had overwhelmed by competitive announcement of historical operating loss by Japanese giant corporations. Companies and economists are quick to blame consumer on their stingy spending. No market promotion or federal assurance seemed to boost up consumer confidence. The market freefalls bottomlessly. Eventually, governments stepped in to spend the money – taxpayers’ money, which will be paid back in the coming couple of years, with an interest. Is non-spending really the cause of the trouble, or is the past extravagance overshadowing the present?
The price paid is exactly the salary of an employee. If no one spends, the economy would collapse. But now there is a good reason why consumers withhold from spending. During times of uncertainty, everyone hops on the most liquid asset: cash. This phenomenon is more evident in less affluent countries where the social security is nonexistence or at best rudimentary. Many people understand the importance of a liquid market, but the liquidity is a result of collective behavior. Apparently, like public recycling program, not many people share the passion. People in China save 28% (roughly 4 times of that of Americans) of its income even during good times, unless a very unlikely change of mentality, 2009 is going to be a very difficult year for Chinese retailers.
Along with other trade tariffs proposed by Obama, the scrutiny of devalued Chinese currency as the cause of growing U.S. trade deficit is expected to be tougher under Obama administration. But as many American economists proposed that currency revaluation would hardly solve the issue; the fundamental problem lies within American spending style. While politicians are grudging about Chinese export which accounts only for 15% of total U.S. current account deficit, the $ 700 billion stimulus package, which is about 90% of the total current account deficit, will be financed by foreign capitals, for instance, China. The attractiveness of American assets let both the public and private sector enjoy cheap access to global capital. Consumers spent, banks lent and companies expanded assuming that source of finance would never run out. Private saving rate are declining along with the mounting public debt. For that, Japan’s stagnating economy would be the most told example. Americans are less hostile for debt financing than its counterpart in Asia. Alan Greenspan rebuffed the notion of current account deficit damage in his book Age of Turbulence by stating that the growing debt balanced out with expanding assets.
Aggressive debt financing facilitates economic growth but at the same time assumes the inherent financial leverage risk; on the other hand, conservative saving might forego many opportunities (when the opportunity cost of saving exceed the saving yield), but it provides much need cushion during economic downturn. There is a difference in the pro-saving or pro-spending philosophy. But there is no problem in either one of them; they both serve well in its own context. It would be disastrous if people stop spending; but too much spending also triggers economic overheating, and sometimes suicidal competition. Too many times we forego the long term benefit in exchange for some immediate relief. Even everyone knows that the billions of funds given to Big Three (General Motor, Chrysler and Ford) save nothing but the Bush Administration, but no one could stop Bush from throwing the sizzling plate to Obama.
2009 is going to be a difficult year. While many other sizzling plates are still floating in the air, should we think twice this time – What shadows are we making for future generations?