

German and Chinese thrift built up a glut that fed bankers and bubbles. A world-sized fix means rebalancing global trade



The flood of savings in the global economy arose from Germany and China's persistent trade surpluses over the last decade. A country with such a surplus sells more to its trading partners than it buys in return. Persistent deficit countries – the US, Britain, Iceland, and the eurozone excluding Germany, France and Italy – sell assets to the surplus countries to pay for their deficits. Thus persistent surplus countries accumulate the assets of persistent deficit countries: in the case of China, US treasury bills; in the case of Germany, Spanish eurobonds, sterling notes, and US sub-prime mortgages.


What was the cause? Germany's surpluses were a result of its attempt to export its way out of the stagnation arising from the reintegration of east and west Germany, and to support an ageing population. Its excess savings were spread among the investment hotspots of Spain, Portugal, the Baltics, Ireland, Iceland, Britain and the US.

The origins of China's persistent surpluses are more ominous. Data from China's central bank show that the steep rise in income over the last 10 years created by export-led growth largely bypassed ordinary households. In contrast, from 1997 to 2007, corporate profits as a percentage of income nearly doubled, reaching 23%. And the principal beneficiaries were the state-owned enterprises. Politically powerful, they enjoy a privileged position – with cheap government-directed credit, subsidised access to resources, and low wages without worker protections, they effectively transfer income from workers to state-owned enterprises. Unless the government spends some of its huge holdings of US Treasury bonds to help its citizens, or compels state outfits to share their profits with households, one must question whose interests within China are being served by these policies.

The short-term problem of managing the fallout from the savings glut and the longer term problem of ending it both appear devilishly hard. Because hard-hit eurozone countries can't use currency depreciation they face years of grinding asset and wage deflation. To add insult to injury, the European Central Bank's relatively tight monetary policy is better suited to Germany than to devastated deficit economies like Spain.

It is Britain's good fortune to possess a falling pound, which almost certainly will allow it to recover more quickly than troubled eurozone economies. And the UK has dealt forcefully with its crippled banks in comparison to the US. In both countries, however, deregulation of financial markets led to excessively large financial sectors, fuelled by merchandising of the savings glut, leaving them unable to confront the mounting consequent problems.


Short of a miraculous new technology to soak up the savings glut, a global rebalancing of production and consumption will be necessary. Persistent surplus countries will need to save less and consume more; deficit countries will need to consume less and save more.

In practice Germans will need to overcome their fear of fiscal deficits and become less export-dependent. China will be a harder case. According to the European Chamber of Commerce, China is adding excess production capacity at a breakneck pace. And by keeping the yuan artificially low, it is stymying global rebalancing. After it recently told the US and Europe to butt out of its currency affairs, western leaders may find the threat of sanctions is the only way to get the attention of China's state-industrial complex. Afflicted eurozone countries should insist on looser monetary policy and curbs that will prevent internal eurozone trade imbalances getting out of hand again.

And eventually, but not until their economies are clearly on the mend, Americans and Britons will have to get their fiscal houses in order. In the end, perhaps we will have learned from this experience just how expensive cheap credit and excessive thrift can be.