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Bernanke wants U.S. to save, China to spend Add to ...

It sounds simple when Ben Bernanke explains how to fix global imbalances in trade and investment: Asians should spend more and Americans should save more.

But the reality is much more complicated. For starters, China and other Asian countries swimming in surpluses will have to turn away from their heavy reliance on export-driven growth and the U.S. will have to corral its budget deficit. These lofty goals will require wrenching change in cultures and fiscal policies.

The U.S. Federal Reserve chairman addressed both issues bluntly in a speech yesterday. But he made no mention of another critical part of the imbalance puzzle - the undervalued Chinese currency that has made China's exports so cheap and helped fuel the U.S. asset bubble.

"That's the 60,000-remnimbi gorilla in the room," said Robert Barbera, chief economist with ITG, a New York-based research and trading firm. "For all of the mistakes that were made in the U.S. - and there were plenty of them - the single most destabilizing policy of the last eight years was the remnimbi peg" to the U.S. dollar that has forced China to buy trillions of dollars of U.S. bonds to keep its currency steady.

The U.S. "must increase its national saving rate," Mr. Bernanke told a financial conference on Asia, sponsored by the Federal Reserve Bank of San Francisco. "The most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time."

Yet just last week, the U.S. government revealed its budget deficit reached a record $1.4-trillion (U.S.) in fiscal 2009.

Mr. Bernanke also added his voice to the growing international chorus calling on China and other export-focused countries to reform their economic practices.

"Trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term," Mr. Bernanke declared.

His comments were in line with similar sentiments from the Group of 20 nations at their summit last month in Pittsburgh. The G20 also studiously avoided the issue of currency revaluation.

"Sometimes, it's what you don't say that matters most," said David Rosenberg, chief economist with Gluskin Sheff and Associates in Toronto.

But even with the currency issue unresolved, there has been progress.

"One of the silver linings from the dark cloud in this credit collapse has been that the global rebalancing process is actually accelerating," Mr. Rosenberg said, pointing to the narrowing U.S. trade deficit and other positive signs.

The question is whether it is realistic to count on China taking over the consumer spending crown from the U.S.

Chinese consumers are already doing the best they can, buying cars and other big-ticket items at a healthy clip, but over all are in no position to become a driver of global growth, Mr. Rosenberg said.

Others argue China doesn't have to become the consumption king to shift part of the burden of global growth from tapped out Americans.

Turning the Chinese into a nation of consumers capable of redressing the world's imbalances "is not as unrealistic as it sounds, because there are a lot of them and they save so much," said Avery Shenfeld, chief economist at CIBC World Markets.

"What we're talking about is the loss of economic momentum from U.S. consumers saving a bit more of their income, and how much of that could be replaced by Asian consumers saving a little bit less."

The Chinese economy remains considerably smaller than that of the U.S., but Chinese households save three times more on average than their U.S. counterparts, so a considerable amount of cash could be freed up for spending.

A CIBC study calculated that a 3-per-cent rise in the savings rate of OECD countries would chop $600-billion from annual global consumer spending. But about a 5-per-cent decline in the savings rate of China and other emerging nations would add $900-billion.

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