Rethinking the evils of current account deficits

Ross Gittins is Rethinking the evils of current account deficits and concludes that the source of the problem of the USA's growing current account deficit is with the PRC:

So the problem is the Asians have been saving more than they want to invest, leaving a surplus that has to be invested somewhere else in the world. Had the Americans not been willing to take those capital inflows - and use them to make up for their dearth of saving relative to investment - the world economy would have been much weaker than it was. Indeed, it would have been in recession.

So that's the "glut of savings" argument. Now, you may object that it's a terribly convenient argument for the free-spending Yanks to be running.

That's obviously true. But, as Mr Macfarlane has argued, it actually fits all the facts better than the story that blames the global imbalance on the US. In particular, it explains why US and world long-term interest rates are so low at present.

If the Americans are having to attract from a reluctant world all the funds needed to finance their big deficits, how come their currency is still quite strong and their long-term interest rates so low?

If the quantity of loanable funds demanded has been rising, how can the price of those funds (long-term interest rates) have been falling? The obvious answer is that the supply curve must have shifted out to the right.

That is, there must have been an increase in the global supply of loanable funds. And there was. For their own reasons, the Asians decided to cut their investment relative to their (amazingly strong) saving.

So, contrary to conventional thinking, the source of the global imbalance is Asia, not America.

The Economist is more pessimistic about this imbalance when they examine the Rebalancing Act (Subscription or purchase required - see 24 Septemebr 2005 Issue, pp.23-24, 'A Survey of the World Economy'):

IF THE first step towards finding a solution is to agree on the problem, the world's policymakers are still a long way from solving the global imbalances. European politicians blame American profligacy, urging Mr Bush's government to cut its budget deficit. Chinese politicians echo those sentiments.

Yet for American lawmakers on Capitol Hill, there is only one villian: China and its undervalued currency. The analysis in the White House is more sophisticated, but still tends to [former US Reserve Bank governor] Mr. [Ben] Bernanke's view that America's current account deficit is not "made in the USA".

The main problem is that:

More important, America's easy access to cheap money is pushing the economy in the wrong direction. Most of the foreign money is going into consumption and housing rather than boosting investment in productive American assets. Building houses does not raise long-term economic growth in the way that equipping a factory does. And the current rate of consumption, fuelled by housing wealth, leaves many indebted consumers at risk. The world as a whole may have savings to spare, but many Americans do not.

Emphasis Mine

And the article concludes that:

... the present [US] deficit is excessive and dangerous. Left alone, it could end in a global recesion, rampant protectionism, and even a disastrous financial crash. That is why policymakers need to act soon. With his "savings glut" speech, Mr. Bernanke focused attention on the scale of the global thrift shift. Now, as one of Mr. Bush's top economic advisors, he should persuade his boss of the importance of making the thrift shift safe.

And speaking of the US Real Estate market, I picked up the following article via Too much debt and too few brains about I'm Tom Barrack and I'm Getting Out . The world's best real estate investor has made billions in the U.S. market. Now he's cashing out and buying overseas.

Today Barrack sees signs of the tech bubble mentality in the U.S. real estate market. Too much capital is chasing real estate, he complains, with hedge funds, private-equity groups, and rich investors all bidding up the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5% or 6%," says Barrack. "That's too low." And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend that few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 30% in the past nine months," he says. The reasons: shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.

In other words, Ross Gittins is talking through his hat. The US ecoonomy is completely stuffed.

My previous posts on this subject were:

• Another Country
• Usama bin Ladin and USA's Credit Bubble.

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More on Riots in Toledo Ohio USA

Pat comments on my post about Riots in Toledo Ohio USA

"The fears of white people has been stoked by the Nazis when they got the black residents to riot."

Douglas, are you suggesting that the responsibility for rioting by black gangs is with the dozen whites who marched in protest over black gangs?

The simple answer is yes and no. The complexity comes from the existence of the racist society in which this event occurred, and from the responsibility of individuals for their actions. If it was reasonable to expect that a march by Nazis through a black neighbourhood would cause a riot, then responsibility for that riot lies with the organisers of the march. Also the members of that neighbourhood could have chosen other ways to protest or stop the march. The problem is that I do not know what options the African-Americans had available to them. They may have tried other methods before without success.

These actions do not occur in a vacuum: there is a historical and political context here of the miasma of racism. A racist society is not a natural state of affairs. It has to be continually maintained and enhanced to keep control of society. The Nazis are not the prime drivers behind racism: they are merely the supporting cast. The real culprits are all those 'nice' people in business suits, wigs, academic gowns, and tweed jackets as they make decisions about who gets hired, who gets gaoled, who gets educated, and whose point of view gets written.

The article has since been updated and is now called Neighbors defend protest over neo-Nazi march which has the following

Much of the anger boiled over because people were upset that city leaders were willing to allow the [white] supremacists to walk through the [African-American] neighborhood and shout insults, residents and authorities said.

"You can’t allow people to come challenge a whole city and not think they weren’t going to strike back," said Kenneth Allen, 47, who watched the violence begin near his home.

...

[Police Chief Mike] Navarre said the riots escalated because members of the National Socialist Movement took their protest to the neighborhood, which is predominantly black, instead of a neutral place. "If this march had occurred in downtown Toledo, we wouldn’t have had the unrest," he said.

...

Neighbors were divided about the city allowing the march.

"They don’t have the right to bring hate to my front yard," said Terrance Anderson, who lives near a bar that was destroyed.

Other neighbors said the group had a right to have their say. "Too bad the people couldn’t ignore them," said Dee Huntley.

Emphasis Mine

I gather that some of the residents and the police thought that the actions of the Nazis were provocative.

Pat's question also brings out the circularity of racism: non-whites reacting to whites reacting to non-whites .... The real culprits in this case is the 'liberal media' who published the stories about the black gangs in the first place.

The real challenge for us is to break out of this circle of hate.

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Riots in Toledo Ohio USA

About 600 Protesters riot at Ohio neo-Nazi march in the town of Toledo. One bar was burnt down. 60 were arrested. A state of emergency and a curfew were declared on Saturday. The immediate cause was:

At least two dozen members of the National Socialist Movement, which calls itself "America’s Nazi Party," had gathered at a city park to march under police protection. Organizers said they were demonstrating against black gangs they said were harassing white residents.

The fears of white people has been stoked by the Nazis when they got the black residents to riot. Thus the original fears have been confirmed.

They were mostly "gang members who had real or imagined grievances and took it as an opportunity to speak in their own way," [Mayor] Ford said.

"I was chagrined that there were obvious mothers and children in the crowd with them," he said.

The article from NBC does not mention race but other sites do. I have been unable to find what the story is from the point of view of the protestors. The stories I have seen so far are from the POV of the mayor.

Were the Nazis trying to provoke what David Brooks feared from The Storm after the Storm?

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Shelter Skelter

In issue #239 (10-25 Oct 2005) of The Big Issue, Chris Middendorp writes in Shelter Skelter (on pp.13-14) that there are at least 200,000 household applications awaiting allocation of public housing in Australia. This represents those who are willing to wait ten years or more for a home of their own. There are cases of people paying $155 per week for rent out of a pension of $190 pw. The author concludes:

... Public housing works best when it consists of ordinary homes in ordinary streets. It's a question of dignity.

From my conversations with housing workers in several Australian states, it's clear that there's a substainal degree of shared insight. While it's certainly true that some people become homeless because of personal predicaments such as domestic violence, drug addiction or a disability, the recurring theme is that with professional support many personal problems are manageable. Most people are able to live the kinds of lives we all accept as our God-given right. To make this possible, people need a place to call home. A home offers an anchor; it offers peace of mind. Public housing allows people ... the chance for a fresh and promising beginning.

The author traces the decline in public housing to the shift in government ideology towards the private rental market. But the author does not expand on this.

I believe that this shift creates a rentier class whose income depends on the rents and capital growth of residental properties. These are not capitalists who risk money in businesses (services or manufacturing) but people who are really parasites on the Capitalist system. The rentiers do not increase the wealth of the economy but rely on the increase in wealth to increase their rents without any investment whatsoever.

From the perspective of the ruling class, the rentiers are more docile than the petite bourgeious, and more reliable in supporting the status quo. Increasing the number of rentiers makes for more dependent people while discouraging the petite bourgeious.

The captalist economy suffers as more capital is removed from productive investments into the dead zone of property investments. The ruling class maintains control by slowly strangling the capitalist economy.

An expanded public housing programme would force this unproductive capital back into the productive parts of the economy. In this case, a socialist policy invigorates the capitalist economy.

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