An article by Niall Ferguson and Moritz Schularick in today’s Wall Street Journal says that the only way to understand the U.S. economy is by rolling it up with the Chinese economy, with which we do an enormous import/export business. By itself, the U.S. economy has grossly inflated asset values, non-existent personal savings, and ridiculously low interest rates. What happens when we add in China? First off, you get 25% of the world’s people, 33% of the world’s GDP, and 60% of the world’s GDP growth over the past five years. More interestingly, the Chinese portion of the heavily mixed combined economy do the savings and supply the educated low-cost labor force. This explains why the cost of capital (interest rate) is so low and why the returns to capital (corporate profits) are so high. It also explains why wages aren’t going up as fast as productivity and profits.
Are there any clouds on the horizon? The authors identify two: (1) restrictions on imports from China by the U.S. Congress; (2) lack of success by the Chinese in keeping consumer price inflation low over there.
I don’t think it is terribly useful to think in this manner.
The tax system in the USA actually punishes savers, and rewards those who buy the most house they can (thereby having a chance at capital gains due to appreciation) by allowing you to write off your interest payments (interest that comes mostly in the early years of the mortgage).
If you are running a business, you essentially do not have to pay any taxes as long as you keep plowing money back into the business (well, very little taxes) due to 3-year depreciation schedules along with Section 179 deductions for smaller businesses.
All this serves to depress the savings rate.
Further, there is a lack of confidence in many other economies that lead to decisions to park excess cash in the US or at least in US-denominated instruments.
What will really start to cook those of us living in the USA is when actual or de facto dollarization is reversed; at that point the free ride that the dollar has been enjoying in its status as reserve currency will stop and the amount of dollars in circulation will come back to haunt us.