America has always been a land of extremes, a place where, at various times, consumption and frugality have each wielded sacral sway.
It shouldn't come as a surprise, then, that just as the country begins to extricate itself from what might be described as the paradox of gluttony, it is now in danger of succumbing to the paradox of thrift – and dragging much of the global economy along with it.
The former dilemma – which kicked into high gear not long after the Sept. 11, 2001, terrorist attacks, when the Bush administration made consumer spending a handmaiden to patriotism – held that people actually got richer when they collectively saved less: The increase in purchasing demand lifted stock markets and housing prices, inflating the value of personal assets.
This proved a fine theory, so long as these assets continued to appreciate and fuel more purchases; when they didn't, it proved instead a fine recipe for a massive credit bubble, and, by extension, the Great Recession. The problem now, as the pendulum swings wildly in the other direction, is that Americans are beginning to save again.
Saving is something Americans haven't done at all in the past few years, and have done only marginally in the past decade.
In May, Americans stashed away 6.9 per cent of their after-tax income, the highest level since 1993, and many economists figure that number will inch up to 8 per cent or more in the coming quarters. That compares with zilch last year, and a negative savings rate in 2007, when Americans bought more than they earned.
In the long term, this relative miserliness isn't such a bad thing. Spending will once again be a function of incomes, rather than assets, and the U.S. economy will be less vulnerable to the kind of credit-fuelled crisis that we're all trying to climb out of.
In the immediate term, however, there is little doubt this saving will slow the pace of a global economic recovery. The paradox of thrift, first espoused by John Maynard Keynes, posits that if people save too much in bad times, they could actually become poorer: The lack of consumption begets a falloff in demand, which in turn stalls the economy and results in lost jobs.
This is a question of degree, of course: The savings rate now is merely a return to historical levels, and not some unprecedented cinching of the purse strings.
Even so, this incremental increase has profound implications when you consider the American consumer accounts for 70 per cent of the country's GDP.
“This marks a significant change in the global economy,” said Ken Lieberthal, who was the senior director for Asia on the national security council under President Bill Clinton, and is now a professor of business administration at the University of Michigan.
“It means the U.S. will no longer provide the level of consumption the rest of the world has become accustomed to, and built their economic models around. I see the potential for very substantial friction going forward.”
There are a couple of ways to fill the gap.
Americans could export more, but they'd have to export a lot more to offset the drop in consumption – perhaps as much as 3 per cent of GDP, according to Mr. Lieberthal's estimate.
This seems fanciful, when you consider that every other nation on the globe is attempting to kick-start economic growth by selling more of their own goods.
Slower growth
Indeed, in a speech two weeks ago, U.S. Federal Reserve governor Kevin Warsh sought to dampen expectations that the economy had turned the corner, and warned that much of the world could be mired in slower growth for several years.
The evidence is pretty convincing.
True, the sprawling U.S. current account deficit – the amount by which the country's imports exceed its exports – fell to $101.5-billion (U.S.) in the first quarter. But this was hardly a reflection of growing export might; in fact, exports dropped, falling to $249.4-billion from $290.6-billion in the same period a year ago.
Retail sales did nudge higher, providing markets with a quick dose of optimism, but this was mostly because of the rising cost of oil. Strip that out, and sales were up a measly 0.2 per cent.
