Good piece by Paul Kedrosky (who writes at Infectious Greed) on the coming ‘tsunami’ of U.S. savings:

All that money has to come from somewhere, however, and among the main sources will be the United States’ largest trading partners, chief among them China. The U.S. economy is more than three times the size of China, and if you match the U.S. trade deficit against the Chinese trade surplus you’ll see that China accounts for, on average, about 60 per cent of the U.S. deficit. As a result, China is going to need to find a way to replace more than 10 per cent of its gross domestic product if the U.S. savings rate returns to its historical norm. Making matters worse is that Chinese consumers are a smaller percentage of GDP than their U.S. counterparts, so to make the math work, Chinese consumers would have to up their buying by something like 25 per cent. Will it happen? No way.

300 million Americans account for a greater percentage of Chinese consumption than ~1.4 billion Chinese? Makes sense. My electricity bill is typically 3-4x that of my neighbors. Maybe there is virtue in an ascetic lifestyle. There is also virtue in being warm.

As a result, even if China decides it doesn’t like U.S. debt, it may not matter as much as some are claiming:

These are ear-popping figures. [a] Three per cent [increase], for example, produces almost five times as much in one-year U.S. capital inflows as the entirety of China’s current Treasury holdings… In short, at even relatively small changes, at least in percentage terms, the United States will rapidly transform its banking system and its capital markets.

Low U.S. savings was always the primary driver of America’s trade deficits. It will be interesting to see what the world looks like as current trends reverse.