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“Consumption is the only end and the purpose of all production.” Thus he taught Adam Smith. It is difficult to see what the most is the production, now or in the future. Consumption must also be the objective of international trade. But what happens if important players do not seem to believe this? Then, the global system works badly.
The starting point here must be with a fundamental proposition for the economy of John Maynard Keynes: real spending activates potential savings. In addition, he argued, there is no reason to believe that the necessary expense will happen naturally. Called this “The savings paradox“. Sustaining high levels of activity may demand political actions.
Today, excess structural savings of a series of economies, in particular China, Germany and Japan, are compensated (and thus activated) to a large extent by the excessive expense of the most credible country in the world, the United States (and, to a lesser extent, the United Kingdom). The figures are surprising. Only these three major surplus economies conducted aggregate current account surpluses of $ 884 billion in 2024. The surpluses of the 10 main countries amounted to $ 1,568TN. But surpluses are only possible by deficits. Therefore, the United States executed a current account deficit of $ 1,134TN, to which the United Kingdom added $ 123 billion. (See graphics). Donald Trump’s presidency is, in part, a symptom of this reality.
However, this is also peculiar. The excess savings of surplus countries is not absorbed, as they were at the end of the 19th century, for investment in emerging and developing dynamic countries. Instead, they are compensated for the richest country in the world. In addition, at least since the financial crisis of 2008, the national counterpart of this indebtedness is not the financing of the private sector but that of government loans.
Before the financial crisis of 2008, the internal expenditure had been predominantly driven by real estate feeding by credit. These phenomena were not exclusive to the US, although the US has long been the largest global borrower. Also in the Eurozone and the United Kingdom, net loans by countries with huge current account deficits, before the financial crisis, was largely driven by property bubbles fed by credit (such as in Ireland or Spain) or fiscal deficit (as in Greece). When those property bubbles exploded and the financial systems were blocked, the consequence was also a huge fiscal deficit on almost everywhere.
In summary, we now seem unable to convert surplus savings in some countries into productive investment in other places. One of the reasons for this is that countries capable of borrowing sustainably from abroad have single coins. This rules out most emerging and developing countries. Also, it turned out, mainly discarded members of the Eurozone deficit. In such world, it is not surprising that the dominant borrower and the speaker is the United States government. But is that a good result of the liberalization of global capital accounts? Hardly! It is a great failure that all these surplus savings will be seen in this way, instead of investing in productive activities, especially in the poorest countries.
In addition, deficit countries are quite unhappy with this agreement. Yes, they can spend more than their added income. But they are not grateful. No less important, if a country has a large commercial deficit, it will consume more commercializable goods and services than it produces, since its residents cannot import not tradeblas without traveling. Then, in the deficited countries, the manufacture, a central part of the commercializable sector, is smaller than in the surplus countries, where the opposite is true. This point, made by Beijing with headquarters in Beijing Michael Pettis, It helps to explain the very high American protectionism and, therefore, Trump’s commercial war. The latter can be chaotic, in fact irrational, but its origin is not difficult to identify: manufacturing issues, politically and economically.
Unfortunately, the result is not so good for countries with surplus savings: Japan is a prominent case. To reduce their current account surpluses in the 1980s, under the pressure of the United States, it pursued ultra easy monetary policies, to increase domestic demand. This fed an unsustainable property bubble. When it appeared in 1990, Japan suffered a financial crisis, weak demand from the private sector, prolonged deflation and huge fiscal deficits. It could be said that it has never recovered. Surprisingly, but not so surprisingly, Japan’s net public debt has exploded, 63 percent of GDP in 1990 to 255 percent last year.
China, not differently, had to eliminate much of its excess savings after the financial crisis of 2008 caused the huge American deficits and Chinese surpluses in the early 2000s to be unsustainable. After 2008, China also flew a large property bubble and credit and boom investment. The sequelae is now suffering, which includes weak internal demand, low inflation and large fiscal deficits.
Germany was relatively protected by Eurozone membership. But the financial crisis of the Eurozone was also a natural result of its huge external surpluses. Since then, the Eurozone has solved its problems after the crisis being more like Germany: it previously had approximately balanced external accounts. But today, it has also become a considerable net capital exporter.
The biggest problem with Trump’s international economy is that it focuses on a symptom, the United States trade deficit and seeks to eliminate it through erratic and irrational tariffs. This may have done a little less harmful For this week’s “agreement” with China and resulting decrease (perhaps temporary) in bilateral rates. But without macroeconomic rebalancing, the United States commercial deficits will remain. A necessary condition for this is to reduce fiscal deficits in the United States, along with policy changes in other places, in particular China, with the aim of reducing excess savings.
Saving is a good thing. But one can still have too much of that sometimes.