Of, course now I have this stuff in my head and it needs to go somewhere. Eventually it will find its way into my courses, but first it needs to be fleshed out and reflected on some more. So, I'm going to do some of that here.
The first book to get this treatment is Michael Pettis' The Great Rebalancing: Trade Conflict and the Perilous Road Ahead for the World Economy (2013, Princeton University Press). Pettis is a finance and economic professor at Peking University who frequently comments on China and the global economy.
The Rebalancing that he focuses on is between countries that run a surplus of savings (e.g., China and Germany) and those that run a deficit of savings (e.g., the US, Spain, Portuagl, Itay, and Greece). A surplus of savings is the amount of national savings above the amount demanded in the domestic economy at the prevailing interest rate, and a deficit is the amount of savings below what is domestically demanded. He argues that, in a global financial market (one without capital controls between nations), deficits and surpluses must add up to zero, or balance each other.
Therefore, if a nation has financial and macro-economic policies that result in a surplus of total national savings, this surplus will have to be balanced by a deficit in some other nation. The surplus nation will export savings and, in return, essentially import demand for its products, which is manifested in a capital account deficit and current account (or trade) surplus. This will lead to low consumption and high employment in the surplus country. The deficit nation will be compelled by international market conditions to import the savings and export demand, resulting in a capital account surplus and current account deficit (in short, it will attract foreign investment while running run a trade deficit). This will lead to high consumption and lower employment in the deficit country, the latter of which can be avoided only if the deficit nation incurs increasing debt or erects capital controls.
Now, of course, this can work the other way around. A savings deficit nation (or nations) can draw in savings if it (they) implement financial and macro-economic (and fiscal) policies that push down the national savings rate. This will produce exactly the same outcome and, therefore, the causal link runs both ways.
Pettis' main argument is that the global economy is plagued by an imbalance between savings surplus nations (primarily China and Germany) and savings deficit nations (primarily the US and struggling EU countries). Furthermore, he argues that the causality runs from the policies of the surplus nations rather than those of the deficit nations. Nations like China and Germany have pursued policies that prompted national (not necessarily personal) savings rates beyond any level that can be effectively utilized in their own economies and have dumped the surplus onto the global (or in Germany's case, the Euro zone) market. This produced conditions that resulted in lower savings rates and increased indebtedness in the deficit nations. Because deficit nations face a choice between increasing debt or decreasing employment, governments are often politically compelled to choose higher debt, which often leads to unsustainable levels of debt.
In making this argument, Pettis rejects what he views as moralistic commentary that lauds the surplus nations and their cultures as hardworking and thrifty, while condemning deficit nations and their cultures as lazy and spendthrift. He notes that it wasn't that long ago that Chinese intellectuals lamented the laziness and lack of savings among their peasants. Also, he points out that there is a big difference between personal savings rates, which might be analyzed in terms of individuals and cultures, and gross domestic savings rates, which are better understood in terms of economic policies.
He also argues that the policies that produce the surpluses run deep in the surplus nations' economies and may not, on the face of them, appear directly related to trade. In the case of China, currency manipulation is only the tip of a policy iceberg that extends to repressive financial polices and a bloated public sector that have shrunk the household sectors share of GDP (albeit while allowing absolute household income to increase in absolute terms due to the high rate of growth in GDP).
What is interesting about Pettis' argument is that it redirects our attention away from the deficit nations (particularly in the case of the Euro crisis) and, also, away from the typical trade related policies (as in claims of currency manipulation in China). Instead, he focuses attention on the surplus nations and the policies that overstimulate the nations' savings and understimulate their consumption. Thus, the level of household consumption in China, and steps that can be taken to increase it, become a central focus in analyzing the nation's economic prospects( as well as those of other nations like the US). Similarly, the impact of the Euro on German exports becomes a central part of the explanation for Spain's difficulties.
He also argues that the deficit nations are not the only ones at long term risk from the imbalance. When the debt they must incur to avoid lower employment becomes unsustainable, the deficit nations will have to either default or impose austerity and capital controls (or all three) that will produce the previously avoided unemployment. At this point they will no longer be able to export demand to the savings surplus country and this will make the surplus counties' policies unsustainable. Surplus countries will find themselves with excess productive capacity and a host of investments that can not pay for themseleves. Thus, they face the prospect of a so called "lost decade" of stagnant economic growth. Indeed, Pettis argues that the surplus countries face greater losses in the long run that then deficit ones.
I'll leave the summary there, but I expect to take a deeper look at a number of issues Pettis raises in the future.
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