An Economics Lesson

I'm on a roll with these posts that have nothing or very little to do with this website's goal of expressing my experiences of South Korea... but what the heck, why not?

I am about to nicely repackage and present to you one of the most memorable and enlightening lectures any of my professors ever gave: the correlation of personal savings and the productivity of a whole nation's (or region's) economy.

But first, look at this article about Chinese men having to seriously jump through some serious hoops just to get some attention from the ladies. It's an article talking about how Chinese men have to have a mortgage to prove to women that they are worth marrying.

We all know that the 'great red dragon' is a rolling snow-ball of an economy, a steam-roller, or whatever other phrases might apply. But how did it get that way? And what is the primary difference between the growing Chinese economy, and the shrinking American economy?

The difference is the savings rate... combined with the abundant cheap labor, and the incredible gap between the living standard of the average Chinese citizen and the average Westerner. I'm just focused on the savings rate, though, since I strongly believe that America could be growing at a much brisker pace if our savings rate was higher. Its simple: when people save money, banks can lend that money, or invest it in the stock market or other business ventures. The goal of the individual is to keep their money safe, and where possible, get a nice interest rate so their money can grow. The goal of the bank is to use the money people deposit, to make more money; they invest in projects with foreseeable cashflows, they pick stocks, and they lend the money to other banks, who might be willing to guarantee a nice interest-rate because they need the money to do one of first two things. The more money is lent, the faster the money changes hands, the more funds are available for business loans, and the faster the economy grows. When people are not putting much of their money into the bank, there is less money available to lend to growing business - and consequently the economy as a whole slows. It's beautifully symmetrical: when the opposite occurs (people save more), investment increases and the economy expands. This is the basic difference between the American and Chinese economies.

What is happening in China is so perfect that it is difficult to believe that it was not orchestrated -- and my hat is off to the Chinese authorities! They started with an immense population of dirt-poor people; then they put restrictions on babies allowed per family; while at the same time they graciously accepted Nixon's proposal of lifting sanctions and opening up the Chinese market to foreign direct investment; then bargained their way into the WTO on their own terms - one of which was that any foreign company wanting access to China had to partner with a Chinese company (most of which are State-owned). The result is a population hungry for the 'Western' lifestyle, which is made possible by foreign direct investment and dangled in front of them like a carrot - then lowered the value of men (by way of over-supply) so that the women would have the power to demand more exceptional men who have acquired a degree of affluence, which of course fuels the economy as men save up their money to buy a house. While saving so much, their money rests in the capable hands of the banks, who invest in promising business ventures and fuel economic growth. Of course, after they have saved up enough to make a down payment, the money is still in the bank, and the bank also gets a nice new asset, the mortgage and its promised cashflow for the next 30 years. It's incredible, and from a strategic point of view, it's beautiful.

I also want to point out that other East Asian countries (Japan, Taiwan, South Korea) have all shown that they retain a very high savings rate, even after attaining 'Western' style affluence. It is reasonable to expect China to do the same: its a cultural thing... and that means that China is really only just warming up.

In contrast, just as China was beginning to open up to the world, America started easing up the laws prohibiting usury. Nixon made his historic visit to China in 1972, which started the process of China's opening their market. Then in 1978 the US Supreme Court ruled that borrowers were subject to the laws of the state of the lender. That means that if loan sharking is allowed in South Dakota but against the law in every other state, all the loan sharks will move to South Dakota and try to lend money to people of the rest of the country -- and that is exactly what happened in the form of credit cards. Now we have huge sections of our population in debt to credit cards, and the national average for savings is very low -- some say less than 1%.
In that article I just linked, if you scroll down to where it says our official numbers on the savings-rate might be artificially low: "...Commerce Department calculates the savings rate, it doesn't include things like capital gains and investments in pension plans." That's an interesting line, and its also interesting that the author didn't give it much elaboration -- I will elaborate on it. What that means is only that we have some extra stratification of wealth; the rich and almost-rich have investment-portfolios, while most of the country does not. Given that the average savings-rate would be slightly higher if it included investments, that means that the poor (and even just average) people in America are actually quite a bit poorer than even the savings-rate would have us believe. It's nice that some people are doing well, but on the whole, this is not a good thing.

The American economy has been slowing down for quite a long time -- its been on the decline for 30 years, ever since the 1978 Supreme Court ruling on Marquette Nat. Bank v. First of Omaha Corp. Subtract all debt from all savings, and you get the real or long term savings of the individual -- the aggregate of all individuals' savings in the economy being the whole savings of the country, which has been falling. (This is a rather mercantilist way of looking at it, but I like it because it effectively cuts through the fluff and gives meaning to the jumble of numbers.) Sure, we had a boom in the 90's due to the rise of the internet, but at the end of the day, the bubble burst. Sure, the DJIA is much, much higher now than it was in 1978, but with the average American saving so much less now, its really a hollow number. The higher averages on our stock indexes points to two things: yet greater wealth stratification, and a hollowing out of our economy. By "hollowing out," I mean that if savings are the basis of investing, then our economy has less now than before with which to invest. This is the basic thinking behind my "equity-driven economy" vs. "debt-driven economy" theory (which isn't really a theory, but rather a thought-tool). The debt-driven economy can still grow, but its shaky, and can fall easily, whereas the equity-driven economy stands strong.

But there's more. It sounds bad now, but what I call "the squeeze" will only make it worse. "The Squeeze" consists of two things: the credit cards/usury I wrote about above; and the negative effects of insurance. We all gripe about the cost of insurance, but unfortunately it has become a necessity in America (not elsewhere - mostly just here!). The concept of insurance was taught by my professors as a good thing -- that insurance moves the "utility curve" to the right, and allows our standard of living to be substantially higher than without it. Fucking Bullshit. Insurance is a cancer that is invading every organ of our economy, and is actively seeking to spread to other economies. The argument in favor of insurance is that without it you could not have the things you have - the car and house and regular visits to the dentist. Also, they argue that insurance helps us when there is a disaster, like a car accident or a fire. My argument against insurance is that if insurance did not exist at all, you could still have all those things because the cost would be lower, and our society would be better off because people would avoid risky behavior, like driving cars and owning homes. *Gasp!* How will we live without cars and homes? Well, like most people in the world: we would use the safer and more affordable (and more fuel efficient) inter/intra-city rail, and we would not live in these sprawling suburbs, but in condominiums. *Gasp again!* That would take out so much of our economy! Yep, it would be a complete overhaul, which is really what we need. We need to move from a debt-economy, back to an equity-economy, and we are lucky because we have the benefit of being able to copy other countries that already live like this (Europe, East-Asia, Chile). What other thing do all these other countries have in common? They all have much higher savings-rates than ours, and their economies grow much faster than ours. This is how America will be in the future -- it might be a very distant future, but the future it is. We can get to that future the painful way, by hitting a depression that forces New-Deal changes, or we can pass or repeal legislation to set us back on the right footing. It's a long-shot, but if our Supreme Court can overturn 1978 Marquette, and if our Congress and our State's legislatures can turn the squeeze back around onto the credit/bank/insurance companies, we can turn our economy around and keep our nation on top.

Roosevelt said "Speak softly, and carry a big stick, and you will go far." He was talking about diplomacy, but that big stick is really a strong economy.