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.