Also from Michael Pettis:
This is the great irony of the global financial crisis. China, Russia, and France want to lead the charge to strip the US of its exorbitant privilege, and the US resists. And yet if the US were to take steps to prevent foreigners from accumulating US assets, the result would be a sharp contraction in international trade. Surplus countries, like Europe and China, would be devastated, but the US current account deficit would fall with the reduction in net capital inflows. As it did, by definition the excess of US investment over US savings would have to contract. Because US investment wouldn’t fall, and in fact would most likely rise, US savings would automatically rise as lower US unemployment caused GDP to grow faster than the rise in consumption.
But what about the extremely low savings rates in the US. Don’t they prove, as Yale University’s Stephen Roach has often pointed out, that the US is savings-deficient and relies on Chinese and European savings to fund US investment, or at least the US fiscal deficit, because the US consumes beyond its means?
“What the candidates won’t tell the American people is that the trade deficit and the pressures it places on hard-pressed middle-class workers stem from problems made at home. In fact, the real reason the US has such a massive multilateral trade deficit is that Americans don’t save.”
This is one of the most fundamental errors that arise from a failure to understand the balance of payments mechanisms. As I explained four years ago in an article for Foreign Policy, “it may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.” As counter-intuitive as it may seem at first, the US does not need foreign capital because the US savings rate is low. The US savings rate is low because it must counterbalance foreign capital inflows, and this is true out of arithmetical necessity……