The data of the week, month or year has to be the dramatic rise in the US personal savings rate (as a percentage of disposable income). The rise has been nothing short of remarkable. It is a very profound development that, in fact, shows up the policymakers’ resolve to do the right thing by the US economy and financial system.
Just by way of statistical facts, from April 2007 to April 2008, the US personal savings rate as reported by the US Bureau of Economic Analysis averaged a meagre 0.3% per month. It went to zero in April 2008. As of May 2009, it stands at 6.9%. One has to go back nearly 17 years to find when the US savings rate was consistently higher than this. In fact, the speed of improvement in the US savings rate suggests that it might crest closer to 15% rather than below 10%. It is undoubtedly a positive economic outcome for the US, and it is beneficial from a geopolitical perspective, for it, too, provided, of course, US policymakers play their part. So far, that has been the missing element.
Interestingly enough, during the same period in which the savings rate has risen in the US, the public has become less confident of inflation remaining low. As reported in the consumer sentiment surveys of the University of Michigan and the Organisation for Economic Co-operation and Development, expectations for the inflation rate in the next 12 months have been rising in the US and are well above 3%. Clearly, the attempt to reflate the economy with massive liquidity infusion appears to be having the opposite effect. So, policymakers should not ignore the possibility that monetary expansion induces more savings instead of more borrowing and spending.
Normally, the improvement in domestic savings rate and its reflection in the current account balance should be positive for the US dollar. Instead, the US dollar is weakening. It reflects both the current loose policy stance and lack of confidence in the long-term store of value in the US dollar. The US needs to articulate the difference between cyclical currency weakness and structural currency weakness, and persuade the world of its preference for the former. In other words, America should clearly spell out an exit policy from the current expansionary and deficit-heavy policies because, in its absence, the world is ready to discard the dollar.
Unfortunately, the Federal Reserve did not do such a clear communication job after its policy meeting last week. Moreover, even if it does so, it is not clear if the institution enjoys enough credibility for its words to be taken at face value. In the past, it has never exited loose monetary policies credibly and quickly. That is because the US has, in recent decades, put growth rather than structural reform or renewal at the altar of public policy.
In the final analysis, it boils down to whether the US has the stomach to go through a painful restructuring in order to emerge stronger in the end. Indications, even with a new president who campaigned on the promise of change, are that it has not. Recent evidence of regulatory capture by Wall Street is so conclusive that the prognosis for reform and restructuring is bleak. If the US can rediscover its will for reinvention, then it can call the bluff of its nearest political and economic rival—China.
Last week, China reiterated its call for a super-sovereign reserve currency. Unlike American households, China’s households—that save nearly half their income—have not been encouraged to spend. The nominal exchange rate of the renminbi has held like a rock against the US dollar in recent months. Consequently, all other global currencies have appreciated against the renminbi, irrespective of whether their currencies should be appreciating in the light of their cyclical economic weakness. Given that China has no autonomous private sector—corporate or household—the verdict is that China has hardly done its part in reducing the global imbalance.
Consequently, predictions of renminbi becoming the next global reserve currency are both wild and intellectually vacuous. There are reasons why the sterling remained a world reserve currency for a long time and was replaced by the US dollar. The world aspired for English culture and education, and later on, America took Britain’s place. There are also reasons why America rejected China’s national offshore oil corporation’s bid for Unocal and Rio Tinto eventually was uncomfortable with having Chinalco as a strategic shareholder. An authoritarian political system sits oddly with aspirations for a market economy. Right now, China has neither a command economy nor a market economy. It has a political economy.
That is why, for now, the alternative to US global political and economic leadership is US leadership. The sooner the American elite realize this, the better it is for the future of their superpower status. They could do no worse than follow the lead of their own households.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org