By Jeff Harding.
In a Bloomberg interview today, Steven Roach, Chairman of Morgan Stanley Asia said:
China needs to boost investment in social security, private pensions, and insurance for unemployment and medical care, Roach said, to prompt its consumers to save less and buy more goods from overseas.
“Until they can address that key issue, the development of a broad-based consumer culture is still too far out in time,” Roach said.
I assume that the basis of this line of reasoning is that if governments just encourage their citizens to save less, let the government take care of you, that spending by consumers will increase. It is a stunning piece of economic malpractice.
In fairness to Mr. Roach, his comments mostly focused on the cheap dollar creating enmity between the U.S. and China because it stimulates U.S. exports, and tends to make Chinese goods more expensive. True. And it penalizes U.S. consumers who have to pay more for foreign goods. (Yes, I understand the RMB is tied to the dollar.) Apparently he is making news to puff up his new book, “The Next Asia: Opportunities and Challenges for a New Globalization.” He also said the U.S. must think “long and hard” about its relationship with China, which has financed America’s appetite for consumer goods by buying Treasury securities.
Who am I to critique the Chair of Morgan Stanley’s Asia Desk and an author? Here goes:
First of all, China is the largest buyer of U.S. Treasuries because it ends up with most dollars as the result of its exports to the U.S. But, it is false to say they have financed our purchase of Chinese goods. All they have done is finance the deficits run up by our profligate government. The government isn’t buying these goods, we are. If we had responsible governance and financial fiscal policies, this wouldn’t be a problem.
Second, if China is going to be a leader among world economies, it isn’t going to be because of its government social programs. And it isn’t going to be an economic power by encouraging people to spend. The only way it will be a power is if it generates enough internal real capital to finance businesses, and the only way to do that is to increase savings, not spending. If it worked the other way around, spending would have caused unending prosperity in the U.S. But, we all know (now) that isn’t true.
Also, where does he expect the money to come from to provide those wonderful social services to be provided by a beneficent government? Umm … taxes? Yes. And where do taxes come from? Umm … wages and business profits? Yes. And how do we create businesses that pay wages and earn profits? Umm … start-up capital that comes from savings? Yes. You get an A+.
Stephen, please see me after class.
