China and the Liquidity Trap
Paul Krugman writes that the liquidity trap includes:

In this situation, America has too large a supply of desired savings. If the Chinese spend more and save less, that's a good thing from our point of view. To put it another way, we're facing a global paradox of thrift, and everyone wishes everyone else would save less.

The problem is that since China has embraced export capitalism, or become a Tiger nation on the Japanese model, it has increasingly exported to Americans buying cheap trinkets from Walmart on credit. China itself is not turning into a consumer based economy, it is a state sponsored export economy, in the same way Japan, Hong Kong, Indonesia, Malaysia etc are. I think this graph came from Barry Ritholtz's site:

Gross national savings have climbed at the same rate that exports have increased. China is not going to buy America out of this. The only consumer who buys tonnes and tonnes of crap from the rest of the world in the amounts that can save the globe from a deep recession is the American consumer.
Cam Riley: South Sea Republic. Freedom, liberty, equity and an Australian Republic.

Comments
  • adam . # .
    I dunno cam. While the two largest economies in the world, the US and China, being caught in a creditorial embrace is not healthy for anyone, I don't think it's right to describe China as an state-driven export economy in the same way say Malaysia is or Taiwan was in the 70s. It's just too big. At that size of global trade an economy can't run on external trade alone, it becomes it's own centre of gravity. Certainly it relies on exports, but so does, say, Germany. Would you say Germany is not a consumer economy? Plus, try standing on Nanjing Lu in Shanghai (which incidentally has a GDP per capita of Portugal) and saying that ...

    I know that a liquidity trap exists but the idea that an economy of China's size - including all the housing, food, banking, internal transport etc that implies - is somehow like a Naomi Klein caricatured Free Trade Zone, where only international companies exist and none leave assets, is just ridiculous. Incidentally the Chinese stock market does higher volumes that the US, with extremely strict currency controls.

    Furthermore if you look at the very graph you cite, it's not linear at all - consumer spending is going up in every recession (89, 2000) as discretionary income drops.

    Sorry I think I've jumped in a bit hard, but I've been seeing this in a lot of articles now, not just from yourself, and it just doesn't ring true with the numbers or story on the ground. The liquidity trap is not because China's economy is devoid of domestic demand, it's because of the long term monetary policy of the People's Bank of China, and it will have to be resolved by central banks.
    Give me utilitiy or give me something slightly better!