This is the fourth and final post in a recent series drawing on ideas contained in the book Trade Wars are Class Wars, co-authored by economic journalist Matthew C. Klein and economics professor Michael Pettis. The last three posts explored, respectively, the importance of a macro or systemic analysis in economics, the nature and dynamics of savings and profits in the economy and the two broad models of economic development as set out by the authors in the book.
The essential thesis of the book is that rising inequality within many nations is restraining global demand and weakening global growth, leading to conflict over trade at the international level. In particular, excess savings, sometimes called a ‘savings glut’, in countries such as Germany and China, are reflected in current account surpluses. The latter are one way of saying that total savings in these countries exceeds total investment.
These positive net savings, or total savings minus total investment, are in these cases the flipside of underconsumption. They have proven to be unproductive, since they cannot be absorbed by productive domestic investment, and have therefore ended up being absorbed abroad, by countries which are willing to run current account deficits, fueling rising debt-fueled consumption, or rising unproductive investment in the form of financial speculation and asset price bubbles. For several decades, this has particularly been the case for the US, which has been willing to absorb unproductive savings from the surplus countries, and has therefore acted as a global spender of last resort in its provision of demand. Continue reading