American
consumer spending accounts for 70 percent of U.S. GDP. However, because of
stock market turbulence, rising unemployment, tighter credit, and declining
home values, American consumers are cutting back on their spending.
One
reason that this is having a particularly big impact now is that aging Boomers
are more concerned about retirement, as they see asset values plummet. The
natural reaction is to curtail
discretionary spending and focus on saving.
But,
while a renewed focus on saving makes sense for American Boomers as
individuals, it is not going to be good for the U.S. economy or global economy
unless some fundamental changes address serious imbalances in the global
system.
Businesses
depend on revenues to meet their payrolls and make investments to improve
productivity; if spending drops, unemployment could increase and a vicious
spiral could ensue.
So
what needs to happen? Clearly, it’s time for the consumers in other countries
to pick up the slack.
Historically,
people in China and India have had little to spend. Often, they haven’t even
been able to afford the low-cost products made in the factories where many of
the Chinese work, or the computers that Indian professionals troubleshoot for
Americans who call tech-support hotlines.
Compounding
this problem is that, as people in developing countries have acquired more
money in recent years, they’ve shown a much stronger tendency to save than
Americans. The result is what Ben Bernanke calls a “global savings glut.”
Most
of this glut is concentrated in Europe, Asia, and the Middle East. Rather than
spending their money internally, Chinese consumers save it, because they don’t
have a reliable social safety net. Europeans and Japanese, who are older on
average than Americans, also save their money rather than consuming. Middle
East petrodollars are saved or invested as a hedge against a return of low oil
revenues, as happened in the 1980s.
Over
the past 20 to 30 years, most countries eliminated the restrictions that kept
their citizens from investing in overseas companies, stocks, and bonds. As a
result, banks, mutual funds, and governments have increasingly invested in
other countries.
Global
savings is what’s...
