Over the past 10 years, the world has become divided into savers and spenders. The solution to the global financial crisis requires the savers to become spenders and vice versa.
This transition will be helped by demographic factors as the populations in most saving countries are aging, whereas in most spending countries they are young.
The transition will be most dramatic in the United States—which, as a result, is likely to move into a sustainable, though not permanent, current account surplus.
The Coming US Current Account Surplus
A World Divided Into Savers and Spenders Who Need to Change Places
One of the key causes behind the global financial crisis of 2007/08 has been the division of the world into “savers” (countries with a savings surplus) and “spenders” (countries spending someone else’s surplus). The problem with this division is that it is asymmetrical. There is no theoretical limit to how much people can want to save. But spending someone else’s savings involves getting into debt, and there is certainly a limit to how much debt anyone can take on. By 2007/08, it was clear that American households had amassed a debt burden they could no longer service at normal interest rate levels, and that households in some other countries, like the United Kingdom and Australia, were not far behind.
Thus, in order to eliminate global financial imbalances, there has to be a shift between savers and spenders. Households in the spending countries need to save to bring down their debt burden, whereas households in saving countries need to spend more—not least so that the former spender economies can grow by exporting to the former savers. It is possible that this will not happen—that spenders will begin to save but the savers will continue to save at current rates. However, by definition world investments have to equal world savings. If everyone attempts to raise their savings to income ratio, investments will by default suffer and world activity will slow even more.
This may seem a tall order. But there are reasons to expect that over the next five years there will be a sea change in world saving and spending patterns. The reason for this is demographic. As it happens, many of the saving countries are among those with the oldest populations. This means that large cohorts of their populations will imminently change from saving (for retirement) to spending (their retirement savings). Equally, a number of the spending countries have somewhat better demographic profiles, but because of their tendency not to save, they need to start saving considerably more in the near future. This pattern is not true for all countries, but it is true for a large number. Notably, one key development over the medium term is likely to be a shift in the United States from a persistent current account deficit to a sustained, though not necessarily long-lasting, current account surplus.
At first glance some of these developments seem counterintuitive. We are used to some countries being regular surplus countries, with large excess savings. But, in theory, countries with aging, but not yet retired, populations, should have a savings surplus as the working-age cohorts save up for retirement. This is generally the case, as Figures 1 and 2 show.
Figure 1 shows the old age dependency ratio—the number of people aged 65 or above relative to those aged 15–64, in a number of countries in 2005 and 2050. Figure 2 shows the change in this dependency ratio.
Figures 1 and 2 should be read together with Figure 3, which shows current account balances in 2007. As is clear from Figures 2 and 3, the countries facing the greatest deterioration in their dependency ratio are generally also those with current account surpluses (i.e., excess savings). There are exceptions to this rule: Spain is a deficit country, yet one with the prospect of a substantial demographic deterioration over the next 45 years. So, to a lesser extent, are Italy and France. These countries are likely to face substantial difficulties as their populations age—especially Italy, where the population and the labor force are already shrinking and aging fast.
As households increase their spending, some other sector will have to save more. This must be either companies (i.e., they must become less profitable), or governments (by moving into deficit, or further into deficit), or foreigners (i.e., countries whose households are increasing their spending must move further into current account deficit). In other, saving countries—for example, Germany, Korea, Japan, Singapore, to take those with the worst demographic profile—the switch from household saving to spending can be more easily accommodated, since it will simply require a smaller current account surplus—which, as it so happens, is exactly what is needed for these countries from a global economic perspective.
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