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Instead, U.S. "overconsumption" saved the day, providing demand for the world's goods and keeping emerging economies from imploding due to their own domestic consumption collapse, high debt, and excess production capacity. Our consumption was fueled first by a strong domestic stock market, and when that gave way, by falling interest rates and ample liquidity supplied by the Fed. Still, we suffered a brutal bear market and a recession before things began to improve in early 2003.
Any unilateral withdrawal of the demand for goods resulting from a significant rise in our savings rate, unaccompanied by a proportional increase in consumption outside the U.S., would put us on a path to pain again. As my good friend Paul McCulley, the endlessly creative monetary guru at PIMCO, has said, the rest of the world needs to shed the hair shirt of denial and embrace hedonism.
The Asian developing countries are not buying our dollars because they like us (as McCulley also notes); they are doing it because they believe it is in their interest to do so. They are practicing mercantilists, employing an economic philosophy popular in Europe hundreds of years ago, which roughly equates a nation's strength and economic security with how big its pile of currency reserves happens to be. Call it the Scrooge McDuck approach to national well-being.
It would be useful to think about how one would characterize the U.S. situation were the entire world to go to a dollar standard, so the dollar couldn't decline against other currencies because there wouldn't be any. The world would then resemble the U.S., which only has one currency. China would be like a state with a lot of money in its coffers but which might need all that cash to bail out its shaky state banks, for example.
My friend Chris Davis [head of Davis Financial Advisors] told me he was once concerned about how much the U.S. spends on health care as a percentage of GDP. Surely 12% or 13% was unsustainable? He asked Charlie Munger, vice chairman of Berkshire Hathaway. "Who knows?" Charlie said. "How much is the right amount for a rich society whose population is aging and whose material needs are being met? Fifteen percent? Twenty? Thirty? Fifty? We have no idea."
I also think we have no idea how sustainable the "unsustainable" current account deficit might be. Current account deficits even higher than ours as a percentage of GDP have not prevented the currencies of Australia and New Zealand from soaring the past several years.
Do we really consume too much and save too little? Fed data show that while debt has been rising, so has net worth, and debt as a percentage of net worth does not look overstretched. I am not unmindful of the risks. But I do think most of the analysis wildly oversimplified, particularly when the problem is identified as "imbalances," as though the economic system's natural state had been perturbed and until returned to balance it was out of whack.