Here Comes America's Savings Glut

There’s still a faction out there, typically found in Washington, DC, that thinks the financial crisis is the result of the Chinese savings glut. You see, Chinese consumers saved so much, all that savings was used to finance American homes and credit cards causing Americans to buy things they couldn’t afford.

So if the Chinese had only discovered the joys of consumerism sooner, the thinking goes, we might’ve avoided this whole mess. Sure.

In a column for the Globe & Mail, Paul Kedrosky talks about a savings glut of our own in the offing:

To put it in context, a U.S. savings rate of minus 1 per cent meant roughly $2-million a minute was flowing out of U.S. consumer savings into other things, mostly consumption, like TVs and home renovations, and so on. Or, on an annual basis, that worked out to almost $1.3-trillion exiting the U.S. banking system for other places.

Turn that around, however, and things get very different, very quickly. At a 3-per-cent savings rate, the United States will see $3.8-trillion showing up next year in the banking system just from domestic savers. At 7 per cent, almost $9-trillion will come rushing in as part of the savings tsunami. It is a fire hose of money pointed at the banks, and it’s just beginning.

These are ear-popping figures. Three per cent, for example, produces almost five times as much in one-year U.S. capital inflows as the entirety of China’s current Treasury holdings. It is four times as much as the proposed Obama stimulus plan. In short, at even relatively small changes, at least in percentage terms, the United States will rapidly transform its banking system and its capital markets.

As several people are pointing out, the numbers as they appear there don’t quite fit with the size of the US economy, with a GDP of $14 trillion. It’s possible the numbers, as writiten, don’t mean what they appear to… We’ll follow up with Paul.

The loser from America’s savings glut, as Paul notes, is China, which will be selling a lot less to us. (If you think oversavers in China are to blame for our issues, then you might think this is karma — we don’t).

So does this mean we can start financing our own government spending again?

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