From Savers To Spenders, And Back
Click Here to Read the Story at Forbes.com.
Robyn Meredith 11.26.08, 12:00 AM ET
HONG KONG-- "Not since the 1930s" has been the recurrent phrase of this financial crisis.
That makes me think of those who went through the Depression, and of how very different they were, as consumers, from the baby boomers and all who came later.
Grandmothers and grandfathers--even prosperous ones--held on to very thrifty habits, even years later. They reused their plastic bags--all of them, and not because it was politically correct to do so at the yuppie organic grocery store. They scribbled lists on scraps of paper rather than use a fresh sheet. Rode buses and streetcars. They even saved string.
In the decades since the Depression, a remarkable change took place. Americans went from conservers to uberconsumers, from savers to spenders. Most could afford lots more than their grandparents, but spent lots more than they could afford anyway.
Finally, "the consumers just ran out of money," said Clyde Prestowitz, president of the Economic Strategy Institute and author of Three Billion New Capitalists. Americans have stopped trading in their cars every two years and stopped filling up their shopping carts with goodies on impulse.
The way Prestowitz sees it, that's why what began as a financial crisis has morphed into an economic crisis. Since the end of World War II, "the U.S. consumer has been the primary engine of growth driving the global economy," he explained in a speech here last week, near the harbor where containerships coming from Chinese factories begin their journey across the seas to the Wal-Marts of America. "The American consumer finally hit the end of the rope."
Sure, the current crisis started as a financial markets crisis that spiraled downward from the subprime loans that should never have been made, helped by greedy bankers, blind ratings agencies and apparently lax oversight from regulators. The ensuing clampdown on nearly all credit has turned Wall Street's most exotic creations into Frankensteins haunting the real economy. While trouble started in the U.S., it spread around the world and boomeranged back to American consumers on Main Street.
Lots of economists looked at America's huge trade deficits with Asia and wondered how long global economic imbalances could go on--Prestowitz included. "All of us thought it would be the dollar," he said. They were wrong. What finally gave way "wasn't the dollar, it was the American consumer." Now, those imbalances that built up are being readjusted, quickly and painfully.
"We're having a huge structural shift," Prestowitz explained. "What this economic crisis is saying is the global economic structure that's been built up is not sustainable." Asia's enormous reserves, along with a compliant Fed, helped hold down interest rates in the U.S. as Asian economies grew. That created a global bubble.
The solution is global, too. Consumers must restart spending, Prestowitz suggested--and not just in the U.S. According to the International Monetary Fund, China alone accounted for 27% of the world's economic growth last year. "The savings of the world are in Asia and the Persian Gulf. The financial centers of the world are in New York and London," Prestowitz said. "There's no Asian bond market. There's no Asian currency. There is a real mismatch here."
The good news is that, so far, Asia has been part of the solution, bringing to the table fast economic growth that is helping multinational companies stay afloat as they sell more to Asian consumers, particularly the Chinese. "The Chinese consumer is awakening," Victor Fung, chairman of the International Chamber of Commerce and chairman of Hong Kong trading company Li & Fung, told Prestowitz.
Let's hope that American consumers soon join them--modestly this time--rather than become so traumatized by their financial losses that they turn into their grandparents, always saving for a rainy day. There must be a middle ground between unnecessary restraint and profligacy.
Robyn Meredith is senior editor, Asia for Forbes magazine and the author of The Elephant and the Dragon: The Rise of India and China and What it Means for All of Us. She writes a weekly column for Forbes.com.