It is absurd to blame the current economic crisis on America when most of the other rich and powerful countries in the world were running trade surpluses. A trade surplus is sign that a country thinks it would make more money investing in other countries then it would make investing in itself. So China, Japan, Germany, Russia, and others had more faith in American and few other countries than they had in their own economies. It was the fact that so many countries had no faith in their own economic future that led to the crisis.
Felix Salmon explains how that worked out for Germany…..
Maybe it’s just that Germany was running a massive current-account surplus, and needed to lend lots of money abroad, and that German banks as a consequence would lend to just about anyone. After all, the $21 billion in exposure to Iceland might be multiples of Iceland’s GDP, but it’s still a mere fraction of German banks’ $311 billion exposure to Spain, or their $241 billion exposure to Ireland.
Germany is likely to lose serious amounts of money on all of those investments. But why did they ever place themselves in a position of loaning more money to Iceland then its GDP was worth? Why were Germans so eager to loan money to Iceland instead of their fellow Germans?
We can restate that same question with America as the subject.
The problem with America is that it was growing its net indebtedness faster then it was growing GDP. In other words, it was destroying capital. This is not sustainable over the long haul. If US GDP growth had kept up with the trade deficit, then the trade deficit would have been a good thing.
But why were the world markets willing to throw vast amounts of money at a country that was clearly a net destroyer of capital? The short answer is obvious. Many large and powerful countries thought they could make more money investing in America then in their own countries. But why?
I don’t know that I can prove the answer to that question. But I can’t help noting that most of the big exporters of capital have one thing in common. They are all facing serious demographic problems that make America’s demographic problems seem like a cake walk in comparison. When you add up China, Japan, Germany, and Russia you have most of the world’s trade surplus by dollar value. You also have a list countries that are at the top of the list as far as having unbalanced demographic.
Of course, there are many countries that have serious demographic problems and yet they are not running trade surpluses. Almost all of Eastern Europe would fall into this category. So one could have a good argument over just how relevant the demographic problems are.
But regardless of the outcomes of such arguments, the fact remains that the root of the crisis stems from the fact that the world depended on America, Ireland, Spain, and a few other such countries to create a decent return on investment. Anyone seeking to solve the crisis must first understand why so many rich and powerful countries had so little faith in their own countries that they preferred to invest huge sums elsewhere.
Doesn’t Spengler attempt to establish in “The Monster and Sausages”?
As a side note, I saw Al Gore speak about environmental sustainably on Wednesday. His talk was the first time I saw a prominent figure of the environmental movement admit that demographers were relatively certain population growth rates were stabilizing. Indeed, he praised the empowerment of women for lower birthrates in Europe and predicted that this trend would (thankfully) spread from wealthier societies to less wealthy ones. We live in a tragicomic world.
Yes, Spengler made the same argument in The Monster and the Sausages. So have many other demographic worriers who are a little more mainstream. It is actually fairly common to argue that an aging population would start to save more and have fewer places to invest. That was one of the ideas that lay behind my rather absurd post Does an aging demographic structure lead to an export-oriented economy?
The hard part is proving that this is indeed going on. I have no doubt that it is a factor, but when I construct an imaginary opponent, I have a hard time proving it with any kind of rigor.
There are a couple of problems that stand in the way. The first is that much of Eastern Europe has trade deficits and yet their demographic problems are as bad as anywhere on the globe.
My natural inclination would be to argue that because their economies were being held down by communism, they need a lot of capital to bring up there productive potential to first world standards. If I argued this way, I would say that Germany runs trade surplus because it has few young people and their older workers has as much working capital as they can efficiently handle.
But if you argue that way, you have to explain why China and Russia run such large trade deficits.
I will avoid boring you with all the rabbit trails that I have gone down while pondering this issue. It is sufficient to note that the issue is not quite as simple as the correlation might seem to suggest.
But me being the arrogant punk that I am, that has not stopped me from forming an opinion anyway. I think that there is causation behind the correlation but I don’t think it is at the first level. That is to say, I think there is something else that is going on that underlies both the demographic problem and the tendency to run trade surpluses.
If you look at Germany, Japan, China, Russia, and other big surplus exporters, I think you will find they all place a huge premium on social stability. That is to say, they all feel that the government should preserve social stability at all costs.
Thus, the politicians in these countries frown on internal competition. That is to say, if I build a fancy new factory that puts a lot of my domestic competition out of work, it is a bad thing because it disrupts the social fabric. On the other hand, if I build a fancy new factory and put lots of foreigners out work, it is a good thing because I build the national wealth.
This is not just a theoretical thought. Bothe Japan and Germany have absurd rules on the books designed to keep small shop keepers from going under. And they both have a consensus style business culture that believes in collusion more then competition.
It is not quite as simple to draw comparisons with China. But it is well known that behind all China’s efficient exporters lie a lot of failed state enterprises that are being kept alive by the generosity of the state.
Russia is the weak link. It is obvious that Russians prefer authoritarian government because they prefer stability to freedom. But it is kind of hard to figure out how the government actually delivers on the stability part in any meaningful way.
Anyway, if you get where I am going, it should not be hard to figure out why a society that puts a premium on stability should think that an export sector is the best way of creating wealth. The costs involved in favoring the export sector are not obvious and the benefits seem like they are.
But I think that this same mindset leads people to be leery of the costs imposed by having children. Since I need to go to bed, I will leave that subject for some other time.
Before I go, I would like to note that even if you buy that explanation, it does not rule out the age based saving models. Rather, it complements them.
As far as Al Gore and the environmentalist are concerned, I think the thing that disgusts me the most is how they turn something that doesn’t want to do into a virtue. That is to say, even in the off chance that they did not believe that environmental doom was an ever present danger; they still would not want to have kids.
So by presenting kids as the greatest threat to the environment, they manage to make themselves feel righteous without giving up anything that they want to do. I have even seen environmentalist justifying flying on jet to vacation sites on the grounds that by not having kids they are already doing a lot for the environment.
Tragicomic indeed.
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