March 5, 2009


Obama, an economic unilateralist (Spengler, 2/18/09, Asia Times)

The silliest thing that clever people are saying about the world economic crisis is that the United States will lose its position as the dominant world superpower in consequence. On the contrary: the crisis strengthens the relative position of the United States and exposes the far graver weaknesses of all prospective competitors. It makes the debt of the American government the world's most desirable asset. [...]

Here's a thought-experiment to gauge the merits of different national markets as a safe haven. Close your eyes and try to imagine what Germany, Japan and China will look like 30 years from now, that is, when a newly-issued long-term bond will mature. Citing Pope Benedict XVI's critique of economics, I argued recently that the market cannot form accurate long-term expectations; it only can imagine future states of the world. (See Benedict XVI is magnificently right, Asia Times Online, December 9, 2008). Let us see what imagination tells us about the world's largest capital markets. The conclusions of this exercise, I will show later, reinforce the founding premises of "supply-side economics", the theory that guided America out of the 1979-1983 mini-depression.

Imagination fails in the case of Europe and Japan. One out of every four Germans today is older than 60, and in 30 years the proportion will rise to two-fifths. Japan is even worse: 30% of Japanese today are above 60, and in 30 years the number will be almost half. What does a national economy look like when the demographics are so skewed to pensioners?

We never have seen anything like this before in all of history. Pension and health costs projected forward will crush these economies a generation from now. Taxes will suffocate the dwindling population of young workers. A straight-line projection of present trends takes us to the cusp of national failure. We do not know whether present trends will continue in a straight line, to be sure. The race is not to the swift, nor the battle to the strong, as Damon Runyon said, but that's the way to bet.

Children are the wealth of nations, provided that their nations can put tools in their hands and the rule of law at their back. Countries that lack children are poor. Aging Germans do not have young people to whom to lend. That is why they lent their savings to Americans, through the subprime market, and why European banks are if anything worse off than American banks.

Imagination also fails in the case of China, not because extrapolation of present trends is so frightening, but rather because economic growth cannot possibly continue at the pace of the past 10 years. China is a different country than it was 30 years ago, and it will be a different country in another 30 years. It is in the midst of the largest migration of peoples in the history of the world, the fastest rate of urbanization and the greatest economic expansion of which we know. Its political system and social structure will change so radically that it is impossible to form a clear picture of the country in 2040.

Great opportunities are attended by enormous dangers. China has more young people than any other country in the world, more than all of Europe put together, but too many of them are trapped in rural poverty, uneducated and untrained.

That is why Chinese save half their income, more than anyone else in the world. Part of China's steroidal savings rate can be explained by the one-child policy. People whose children will not care for them in old age require financial assets. What economists call precautionary savings, saving for a rainy day, explains a great deal of the Chinese demand for savings. The sun has shone on the Chinese economy for a generation, but when it rains, who is to say how hard it will rain? Extreme uncertainty about the future explains China's savings rate. have no choice but the only country that has one.

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Posted by Orrin Judd at March 5, 2009 8:50 AM
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