There is one iron rule that must hold, which is that the sum of all the surpluses and the deficits across all countries has to be zero.

Somebody has to eat the surpluses.  It used to be Malaysia, Korea, Indonesia, and Thailand, and they paid the price and went from deficit to surplus, but somebody still has to eat their surpluses.  So ultimately it goes to the country who can accommodate that, because it can borrow in its own currency.  When the dollar falls, we don’t suffer the way the Koreans did, with unserviceable debt.  The US is the deficit country of last resort. 

The Asian countries are running protectionism – just differently – by manipulating their own currencies.  They don’t do tariffs, and that’s why the dollar hasn’t been able to fall. 

The problem from the perspective of the US is that if we are importing 9% more of our GDP than we are exporting, it is very difficult to sustain full employment.  You basically have to have a zero saving rate or a bubble in the internet or housing.  But you have to have some substitute demand. 

There is a phenomenon that helps this take place, and it’s really what generated the financial crisis.  If the US buys $900 billion more than we sell overseas, the surplus countries accumulate that $900 billion.  That number is growing every year.  They have to get rid of that money, and the only way they can get rid of that is to go from surplus to deficit, and that would destroy their economic growth.

The US controls how surplus countries deploy dollars in the US.  They are not going to be able to buy US equities – we showed them that in Chevron – and they are going to have to buy US fixed income.  That drove down long Treasury rates, and Alan Greenspan had nothing to do with it.  They got tired of the low yields, and they looked for other fixed income.  They are poor, uninformed investors, and we sold them a lot of bad mortgage-backed investments.  Interest rates got to be really low in the US, and there was a housing and consumer lending bubble, and savings rates went to zero.  And that’s what sustained growth in the US, which sustained demand, which sustained all the manufacturing industries.

There’s a weird stability to this, because the Chinese can’t do anything about it.  If they try to get rid of their dollars, they can buy Euros.  But then the Europeans have the choice of letting the Euro go to $3.00 or buying the dollars themselves.  And then they go back and buy the Yuan, and then the Chinese have the choice of letting the Yuan go up and undermining their exports. 

The problem comes with consumer demand in the US. Basically the saving rate went to zero. In the US, the top 20% of people have 40% of the income and save about 15% of their income.  A lot of that is pension plans and paying off principal on mortgages, so it’s automatic savings. If you take 15% of 40% you have a savings rate of 6%.  This means that the bottom 80% is earning about 60% of the income and is spending 110% of their income.  That is not sustainable.  So, finally when housing prices collapse and the defaults in consumer finance occur, that whole system falls apart.