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US, The New Saver

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The latest job numbers in the US have torpedoed hopes for a V-shaped recovery and instead fuelled fears of W-shaped double-dip recession. Stockmarkets typically rally when companies lay off workers as a lower cost base raises the prospect of higher dividend payments, making those stocks more attractive. Those rules are not valid during a global recession. World markets tumbled on the news that the US unemployment rate hit 9.8 per cent, a 26-year high.

The news jolted manufacturers of consumer goods all over the world and their supply chain partners. In a deeply integrated world, grim employment figures from the US bring gloom to all linked with the US economy in one way or another. The economic turmoil they presage, of course, contains in them seeds of a new world in which the US is trading its role of consumer of last resort to become an abstemious saver, while continuing to borrow massively.

First, the coming storm. The US economy shrank at an annual rate of 1 per cent during the second quarter of this year. Rising US unemployment — coming on top of $12 trillion destruction of net worth in the first quarter spells bad news all around. However, the total number of unemployed — 15.1 million — do not tell the full story: if almost 10 per cent of workers are unemployed, then around double that number are underemployed — working part-time jobs or on reduced salaries or living in fear of being laid off. This means that the biggest shopping season in the US, which runs from Thanksgiving day in November through Christmas, is certain to see fewer customers and smaller purses.

Thus, recent news reports that Chinese factories, buoyed by Christmas orders, are rehiring call for some scepticism. Had foreign demand really picked up, the Chinese government would not need to offer export incentives, as it reportedly is doing. Back in the US, worried about the security of their savings, many Americans have turned to  Treasury Bills that have so far been favoured by foreign savers. And notwithstanding China's grumbling about the future of its dollar-denominated holdings and its threats to withdraw from US debt instruments, it has continued its T-bill buying spree. By the end of July China held $800 billion in US treasuries — the highest among foreign holders.

Chinese nationalists clamour for their government to cut its dollar exposure, but Beijing's large trade surplus rather complicates that plan: despite a significant drop in exports, China still maintains the world's largest trade surplus. While China is spending some of its funds to snap up oil and gas fields and acquire natural resources around the world, it has no realistic option but to invest the bulk of its earnings in US debt. China has said that it would shift its economic focus from exports to stimulating domestic consumption and build social security systems to encourage spending.

A senior official has even announced China would revalue its currency once the crisis subsides. Revaluation of the renminbi would have the effect of making its enormous reserves even bigger and lay the foundation for a higher share of International Monetary Fund (IMF) quota for China. Increased Chinese voting power in the IMF would be a sure sign of a changing order.

As a key supplier of low-end consumer goods, Chinese exports to the US dropped at a slower pace than from the rest of the world, by 14.2 per cent in the first seven months compared to 32.6 per cent from the rest of the world. The falling revenues of American retailers and empty shopping malls tell another story of change coming to the US. Once the engine of world growth, the US import machine has been creaking, but its savings have been ramped up. The savings rate has climbed to its highest level in 24 years as Americans are expected to keep 9 per cent of their disposable incomes in banks. The new American propensity to save may lower export orders from China, but it might help stabilise the dollar — the currency in which Beijing holds most of its assets. In fact, US citizens seeking the safety of government debt are now competing with China in the crowded US Treasury market allowing the government to keep interest rates low at a time when the budget deficit is touching the sky. 

Slowly, but surely, a creative destruction of the old global economic order is underway.

The author is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online.

(This story was published in Businessworld Issue Dated 19-10-2009)