Don’t bet on Asians imitating Americans

By J Saft
March 4, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Asia’s calamity is that Americans are imitating frugal Asians a lot faster than Asians can become free-spending Americans.

The old economic model — that Asia exports to the U.S., saves its earnings and lends the money back to Americans to buy more stuff — is broken and no one can say what will arise in its place.

Americans are not willingly becoming savers, cultural change is being forced on them by the credit crunch and their own busted balance sheets.

The hope for Asia, which has seen an absolutely stunning cliff dive in its economies, is that domestic demand can grow to replace U.S. consumption. This faces huge hurdles; a social safety net that is threadbare to non-existent and a population that just doesn’t understand the risks of living closer to your means but sees frugality and the storing up of wealth as a virtue.

Asia banking on consumption at home replacing that from the U.S. is a bit like Las Vegas trying to make up for plunging gambling revenue by charging more for prime rib dinners; it might help a bit but it’s not a serious business model. In the meantime, economies across the region are seeing really stunning falls in activity and exports.

“Live by exports, die by exports,” Gabriel Stein, chief international economist at Lombard Street Research told a conference in Singapore last week.

Singapore’s own highly trade-dependent economy shrunk by more than 16 percent in the fourth quarter on an annualized, seasonally adjusted basis. Prime Minister Lee Hsien Loong said last week another 8 percent may disappear this year.

Indonesia’s January exports fell by 36 percent, the biggest annual decline in more than 22 years while factories in Korea left almost 40 percent of production idle in the same month. Korean exports fell 17.1 percent in February from the year before, having fallen by a third in January alone. In Taiwan export orders fell a record 42 percent in January. Japanese exports fell by almost half in January, down 45 percent.

China has gotten off relatively lightly in comparison, with exports falling 17.5 percent from a year ago in January.

On the positive side, the government policy response has been reasonably prompt in many places, ranging from admirably front loaded stimulus spending plans that really should make a difference this year to plans to prop up stock markets via government buying which are wasteful, unfair and probably bound to fail.

Shares across the region are falling and so too are some currencies, notably Korea’s won which touched an 11-year low on Monday before the government spent an estimated $1 billion propping it up. Competitive currency devaluations cannot be ruled out.

WHO BUYS WHAT FROM WHOM?

So should Asia just try to ride out the storm and wait for U.S. demand to pick up again?

It may be a long wait. For one thing, the U.S. population is aging, which will pinch consumption in two important ways. Firstly consumption tends to revert to core needs as people get older and secondly retirement plans that were built on high property and share prices lie more or less in ruins and will prompt higher rates of savings to try and catch up.

A recovery in U.S. consumption will come eventually, but it’s not likely to bring the kind of heady growth in consumption we saw from 2000 to 2007, when personal consumption grew at a heady 4.7 percent rate.

So either shutter a lot of those Asian factories or build up consumption at home.

All eyes inevitably turn to China, with its huge population, high savings rate, low debt and fantastic head room for growth. Independent economist Andy Xie estimates that current per capita income of $3,300 could triple within two decades through a combination of growth and currency appreciation. But two decades is a long time, and in the meantime we have to survive the next two years.

And it seems almost delusional to hope that Chinese and other Asian consumers will somehow throw off the habits of a lifetime, habits reinforced by the real risks they face if they lose their jobs and by their self-evident correlation with growing wealth to start to spend more. These consumers will be seeing the same headlines about the stock market and plunging exports that the rest of us do.

It’s also hard to imagine Asians looking across the Pacific at U.S. profligacy and seeing this as a model they want to emulate. Even now efforts at stimulus in Asia seem to focus more on keeping people in jobs rather than insuring them against income loss.

So, maybe over time consumption in Asia will grow as its economies mature, but in the meantime pouring concrete into public works plans seems a better bet for keeping the economies afloat while we wait for the next world economic order to be invented.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund)

39 comments

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Asians could never be as undisciplined as the average American. Asians work extremely hard, have deep pride, and an ethical core the world would do well to emulate. They would never rip off their own families and their own people like the white euro-centric male, who would eat you alive for a couple of bucks.

Interesting. But it’s missing good points on the analysis. The immigration is one of them. It played a role before and can solve many of these issues.

Posted by Armando | Report as abusive

I found this article, at best, to be patronizing, and at worst, to be fear and hate mongering.

It is obvious that Asians never had the spending habits of Caucasians; so, why rub it in with an article like this? Caucasians are already plenty mad over the election of our President. Do we really need them to hate Asians too?

Thank you for listening.

Posted by The Engineer | Report as abusive

have read all the above and find this all REALLY scary. I, at one time had a HK Co that manufactured in China. Just about every shipment (container) had problems due to vendors in China that lied and cheated eachother; lead paint, poison candy, bugs .. there was always something. How about all the meds that have been shipped out of China with toxic ingredients??? I know, those I got too, right in my veins. It’s time for the US to STOP all the cheap manufacturing in China that has no quality control … they don’t care if they kill all of us, our kids and pets. BUY America …. Bring it home to the U.S. We all have paid dearly for all the greed, regardless of the amounts.

Posted by mars | Report as abusive

As usual James Saft, working for a corporate controlled media outlet bent on censoring real news, covers up the real problem. It is the world currency system dominated by the privately owned Federal Reserve System. The Fed, as already acknowledged by Ben Bernanke’s speach on Milton Friedman’s birthday, caused the so called Great Depression. The Great Depression just like the depression today is caused by a deliberate expansion then subsequent contraction in the money supply. This allows the owners of the federal reserve corporation (incorporated in Deleware) to buy up the real wealth in the economy with the paper money that can be produced at will. James, will you ever talk about the real cause of the economic collapse? Asian economies will prosper while the US declines because the media is covering up the crimes of these bankers. Watch the video Zeitgeist:The Federal Reserve and America Freedom to Fascism. How can you talk about the old economic model without talking about the US dollar and the demise of the fiat based money system that supports it? The Asian economies have not outsourced their money creation capacity to private banks as has the US.

Posted by jay | Report as abusive

Thanks for not posting my comment.
Is it so stupid or is it so right that you are not allowed to post it?

Posted by Michael | Report as abusive

I agreed with some of the commentators about war mentality of Americans specially their politicians, Mr.Bush & Dick Cheney are directly beneficiaries of Iraq war, their owned companies are making millions of dollars. They do not care about their peoples and their problem they just looked after their own interest which has brought America today to the ground.

When Mr.Change (Obama) took office we in the east were looking for some real change but seems he is from the same breed, therefore God bless America.

Posted by Al Baloushi | Report as abusive

I agree to the fact which the writer says that the drop in US consumption will affect Asian markets . To some extent he is correct that traditional practices of saving more for future will affect domestic consumption in economies like the one in my country India. However to be India specific the more percentage of the population is between 20 – 40 years hence their risk taking and spending/consuming habits are much different than generations before so enough consumption / demand can be generated domestically.
If and only if our governments and finance ministries get more dynamic to the Global economic situations and bargain big time in Copenhagen at the WTO meet future of Asian markets will be brighter . This will drive US economy upwards. The Asian Economies can be in a powerful situation sooner with a disclaimer that their governments are ready to jump in pool and swim. Asian Economies like China , India etc can drive their economies as well as dig US out of the hole.

Instead of patronizing or subsidizing wise world leaders should just give back what people already owned.
————
Capital Dynamics:

I have been playing with some analytical insights to figure out the underlying functioning of the global financial meltdown as follow:

Lost and Found Conceptions:
Many objects lost can be found so that institutions may have a department to handle lost objects returning them to their owners.

Money can be lost on two ways in the financial market.

1. Lost by transfer.
A person loses his wallet but somebody finding it can spend the money keeping it cycling in the economy.

2. Lost by destruction.
A person loses his wallet in a fire and the money is burned being out of circulation definitively.

Last year only in the US the stock exchange lost by destruction 7 trillion dollars that is considered out of circulation forever. This economic crisis that started in the US and spread globally may have contributed to vanish around 15 trillion dollars worldwide. UN predicted a consequence of 50 million jobs to shed due to this economic downturn.

The approved stimulus package of less than a trillion dollars may provide some sort of relief to a crisis that destroyed about 7 trillions in the US. However the amount destroyed in one year in the stock exchange takes around 5 to 10 years to be created.

Mr. Obama, when a person loses his wallet in a fire it becomes a challenge to claim any loss because there is no way to provide any information about the content lost. The Stock exchange system tracks the stocks allowing losses be reimbursed to owners. It is a good deed retuning money that was meant to pay retirement or college fees, or even charity institutions endowments.

Why to do it?
There are 50 million jobs losses to prevent ensuring a better leadership to the world. A simple smart management in the economic system could avoid such catastrophe.

Transforming stocks to fixed rate investment could give all governments a strong tool to restore destroyed capital back to previous values curbing destructive power from fears. Investors would accept a deal to transform their stock to the purchasing value plus interest rates (2% a year?) with a minimum moratorium (2 year?} for the companies to allow programmed withdrawing.

There is a very fair reasoning since the capital destroyed existed previously originating from many sound sources. Good part of healthy money can be restored to its integrity curbing a worldwide damaging financial crisis worsened by combined effect of fears.

I estimate that there was a general loss around 30% of stocks worldwide; it means that money in such stock applications should be around 50 trillion dollars which allowed about 15 trillions to be destroyed and harm the global economic system.

I believe that 50% to 70% of money lost in the stock can be recovered back as a fixed rate investment meaning 3 to 5 trillion dollars returning to the economy in the US to the purchasing values plus interest rates of the period.

Converting stocks to fixed rate investment can be a permanent tool to prevent future economic collapses and to reduce the size and importance of stock exchange in the economy. Companies would sell stock and ensure that at least fixed rates their stocks should guarantee investors in case of downturns. When a company degrades its performance, its stocks start becoming fix rate investments preventing a further degradation by fears in the free offer-demand rule.

If investors know that their money can be recovered at least at the levels of fixed rate investments, they would not become so eager to retreat from the stock market from falling stocks. In general the stock exchange should compensate at least to the level of fixed rates. This puts a tricky break on falling trends avoiding worsening situations.

What should it be called?
Stock Rescue System:
Governments will make Laws to ensuring that companies selling stocks would offer options to transform stocks to fix rates investments. This amendment would protect against spreading fears and any sort of retreat that spoil parties or overall functioning of the economy. Fixed rates could become a capital investment for withdrawing on investor interest.

There is a strong coherence in nature functioning stating that any single problem can accept or admit many sorts of solutions with variable results. Lost and Found department works pretty well on many places returning lost objects because they were not destroyed and were found. It seems that some money lost in the financial crisis can be tracked back to due owners and returned on a safe fashion to avoid further consequences to the global economy. Also, a permanent Stock Rescue Amendment should provide a way to prevent such situation take place again bringing a more stable economic functioning worldwide.

We are learning that a subtle huge destruction of capital in a short span can be very damaging to the economic system. It is not hard to assume that intelligent humans can organize better their way of handling their common issues.

Whenever wisdom is applied sound results should benefit many from a more coherent outcome
————–

Posted by Elson Silva | Report as abusive

James – what are you smoking? Who the heck is buying all of these treasuries and keeping the prices of that script sky high and the dollar floating into the stratosphere when even a child will tell you that inflation is about to go through the roof. It certainly isn’t Americans. I mean this is hilarious.

Posted by David Lawrence | Report as abusive

Of course Asians won’t imitate the American model, because Asians don’t have the colonizing/gunboat diplomacy/Mpnroe doctrine mentality whereby, when your debtors cannot service their debt, you occupy their lands.

The question of what will take its place has a multi-dimensional answer. One dimension has to do with the international trade, payments settlement/financial, and general global governance architecture. The International Financial Architecture, in particular, has to be reformed in a meaningful way to enable enforcement of debt-servicing in a legally-binding, civilized fashion worthy of the Third Millenium, without recourse to war and violence such as is becoming common in discourse in the West, notably Niall Fergusons’s writings. The international governance structure on international law and justice (the ICC and other dispute settlements mechanisms), on global warming and climate change, on nuclear weapons development/disarmament, missile defense and defense shield arrangements, on the law of the sea, on the development of newly-accessible areas for exploration and mining of fossil fuel and other resources and navigable pathways (the Arctic and Antarctic), on the development of conventions for the civilized exploitation of commercail ventures in space: on all these fronts, a willingness of the West to appraoch these issues in a fair manner will determine how Asia responds.

Then, there is the option of decoupling. AEAN+3 had already launched the Ciang Mai initiative several years ago and have recently reinforced its working. America has introduced a certain degree of “buy America” first provisions in its stimulus package. Nobody wants a pronounced degree of protectionism, but every body wnats both some flexibilty in view of recent experience, and some ‘escape route’ in case the other appraoch mentioned goes awry.

On my part, I am optimistic that a reform of the international financial and governance architecture that accommodates the legitimate aspirations of Asians, but also other emerging countries elsewhere in the world can be agreed. Byt America nd the West must show a far greater degree of understanding and humility than they have done so far.

Posted by Mohamed MALLECK | Report as abusive

Much has been made of the trillion dollars priming effort for kick starting the American economy. But where will that money be spent? And with what aim? Obama government has to be pragmatic in investing this sum. Here is a suggestion:

1. Tie up with India in a cast iron lock-up: offer to loan the money needed to buy American products for infra-structure development, to repaid by loaning Indian defence personnel to gaurd US assets worldwide, be it in US interest areas or for US controlled entities anywhere in the world. Plus use Indian software skilled labour to establish world leading technologies in the US. Assure income support to American unemployed for a couple of years when economy starts building an upword trend.

2. Use US millitary might to engage other countries whose failing governments will need to safegaurd their assets. Again use Indian personnel to do so, in combination with US supervisory staff to oversee. Charge these countries for service provided, payable in agreed resource trading at favourable terms to US.

3. Establish stronger millitary presence in African countries, offering them to establish industries in their countries using Indian/American workforce. In return ask for energy products from these countries.
Also offer them millitary hardware that they need to protect themselves.

4. Don’t allow Europeans another round of colonisation IN Africa.

5. Review the situation on an yearly basis to take stock of the outcomes achieved.

Kanwal Chopra

Posted by kanwal chopra | Report as abusive

To Kanwal Chopra,

You suggest “Tie up with India in a cast iron lock-up: offer to loan the money needed to buy American products for infra-structure development, to repaid by loaning Indian defence personnel to gaurd US assets worldwide, be it in US interest areas or for US controlled entities anywhere in the world”.

Kind of a new Blackwater, right? Sounds like Satyam boss,Ramalinga Raju and Citigroup boss, Vickram Pandit.

May I asl that you kindly give readers a background about yourself!

Posted by Mohamed MALLECK | Report as abusive

Excellent article. Dare I say that there is not really a problem with the world economy, but rather there was (in the form of an unsustainable credit and supply bubble)and now we’re all just reverting to norms. Yes we’ll overshoot and there’s going to be terrible suffering and hardship but that’s what we get for being high on leverage for too long. Sadly, all stimulus plans and bail out efforts will ultimately do nothing but delay the inevitable reversion to the mean. Buckle up.

Posted by Paul B | Report as abusive

Once again Mr. Saft has an opinion, which are likened to noses (we all have one). However Mr. Saft’s opinion is lacking in a few additional and important facts.
As an American (living in China), I can tell testify that ‘most’ Chinese do in fact love Americans. Secondly, China suffers from a similar problem as the US, in that it has an aging population, and a younger generation that doesn’t have the same ideas about things as their grandparents.
I experience this in my own household. My wife is Chinese and saves clearly 40-50% of every penny (mao) that comes to her. Her son, who is in his mid-twenties saves next to nothing, and wants to buy everything in sight (just like Americans he wants it all ‘right-now’).
Consequently, when making comparisons, Mr. Saft should be more careful…….
Respectfully,
EdgyInChina

Posted by Edgy | Report as abusive

The companies received the bailout money are using them for their ‘personal’ agenda.Nothing percolated down.
60% OF job market is with SMALL BUSINESS.By July about 75% may go out of business. Then US may importing much more than now, from Asian countries.

Posted by K.Srinivasan | Report as abusive

peak-oil may soon eventuate, and so to may we witness peak-economics. the very nature of economics is contradictory: the study of unlimited material wants as desired by society under conditions of scarcity(limited resources)

the collective conscience of the economic powerhouses is a masters degree in total disregard of consequence. one does not have to be a graduate of Harvard or Yale to comprehend the fact that if one were to keep clear-felling the Amazon that this is a beautiful, integral feature of spaceship earth forever lost, never again to be worshipped and utilised.

you lay waste the sealife off the east coast of Australia from Tasmania to New Guinea no species will ever again be able to enjoy the wonders of natures’ ocean gardens of eden. if one were to keep flushing toxic poisons and chemical fertilisers off the
sugar-cane farms,of Australias’ wet tropics, directly immersing the Great Barrier Reef, we would have wiped out one of the wonders of the world. an entity in itself never to evolve again, lost forever.

the captains of industry are far to greedy to be able to make decisions from an altruistic altitude to be entrusted with such common wealth, wealth for man, for all time…

Posted by brett kenneth sweeny | Report as abusive

When we come to a place were we stop desireing so much on other countries for our social needs, then we will come to a place of security . We has a country must redefine our wants versus our needs, and then and only then will we see this country turn back to prosperity.

Posted by Ian | Report as abusive

A good read. That’s not about stimulus policy or government spending… it’s the CULTURE. I live and work in Hong Kong and make frequent visits to mainland China for work. The entire business culture up there has been dominated by the strong desire to export cheap products to the West. I agree with Andy Xie’s estimate of China’s per-capita income will triple some day, but having said that, high income is disproportionately enjoyed by less than 10% of the population, or 5%, businessowners or corrupt officials, That precisely explains why domestic demand accounts for only 40% of China’s GDP. Without retirement protection and other safety nets, how can you ask a factory worker in Shenzhen lavish US$1,000 on a LV handbag? He or she saves up to 40% of monthly income.

Posted by Jimmy Chow | Report as abusive