Wednesday, June 29, 2005

The current account deficit

I agree with most of what Kash says on why Asia is lending money to the US. Kash says that it is unlikely Asia is sending capital to the US because Asian countries are corrupt (and therefore high risk) because 1) it's central banks that are doing most of the lending, not individuals, and 2) investment in Asia is, if anything, too high, which does not fit the poor risk story. He ends by saying
Note that the two things that make this pattern possible right now are (1) the fact that the US is living far beyond its means, and borrowing the difference (both at the private and governmental levels); and (2) the fact that households in developing countries like China are saving rather than spending their income.
Personally, I think that 1) is a rational consequence to 2). People in the US are living beyond their means because they are being given free money from Asia. Once the free money stops, the extra spending will stop. While the free money flows, it would be foolish not to take it. Unfortunately, much of this free money spending is going into realestate, so people are just bidding up the price of assets, not buying actual new stuff.

I think people in Asia are saving too much because their economies are managed for export. This means that resources are transfered away from imports (and consumption) to export (and savings/investment). The lesson learned from Japan etc. is that you need to export to grow rich, and even developed economies like the US still share that same mercantile impulse. People in the US are worried that we import more than we export (trade deficit) so is it surprising the Asian governments are worried about that too? Asian currency manipulation has forever been openly targetted to aid exporters to the detriment of importers and consumers.

I'm not sure what it will take to encourage Asian countries to begin treating exports and importers equally, but I think it is that policy bias that is transfering wealth from Asia to the US via Asian central banks.

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