American Consumption Reflects U.S. Government Spending

Mighty America is in big trouble, thanks to the subprime mortgage crisis which sent its financial system into a storm and drove its economy off the cliff. Conventional wisdom blames Wall Street–this is superficial. The root of the problem is probably American consumerism. Logic goes like this: American-style consumption → Fed policy stance → Wall Street did bad things → Housing bubble grew by the day → Bubble burst → The U.S. faces financial turmoil and economic recession → Such woes spread to other economic bodies.

Max Weber believed that European capitalism is characterized by high savings and low consumption. American capitalism is the opposite, with low savings and high consumption. The country increases demand through innovative, increasingly intense, and overzealous expansion of consumption to feed its production, development and technology advancement. The U.S. established the consumption-led economic model in the 20th century and promotes it to the rest of the world, justifying the legitimacy of American-style consumption.

Policy Stability is Secondary

Given that Americans are convinced that a high level of consumption is “our way of life” and the proper thing to do, it is not surprising that they have little savings. What do they do when their current income cannot support their consumption? Borrow from the future. What to do when their domestic credit limit is hit? Borrow from abroad. As long as the U.S. can sustain its military and political supremacy and use dollars as the currency for international payment, it could care less about its foreign debt, balance of payment deficit and insufficient foreign reserves. So long as the world has not lost confidence in the U.S, the country could support its consumption by issuing bonds and printing money until it hit the turning point. One point is clear: economically, the U.S. is a feeble giant.

Under such an overarching social theme, the Federal Reserve (FED) finds it difficult to conduct monetary policy that encourages savings at the expense of consumption. Instead, it has to faithfully follow the principle to promote consumption steadily in low-saving milieu so as to smooth out cyclical fluctuations caused by business cycles. However, monetary policy has little effect on growth inertia after a long period of prosperity. This phenomenon, coupled with the adverse impacts of the dot-com bubble burst and the September 11th attack on the U.S. economy, made “stimulating economic growth” the priority objective for the FED. Policy stability has to take a second seat. As a result, the complementary monetary policy offered persistent lowering of interest and discount rates and encouraged/condoned creativity gimmicks by the financial sector to promote consumption. This is the real reason why Alan Greenspan did not actively regulate the financial derivative product market.

With silent consent from the regulatory authority, the high-IQ Wall Street Bloc practiced an extreme form of capitalism. The Wall Street elites had their eyes on real estate that could serve as a strong engine of growth for the economy. Complex financial derivative products revolving around real estate evolved, consumer numbers expanded, consumers were encouraged to turn their houses from consumption goods into investments and the list went on. All these achieved visible effects in the shortest of time and created the clouded cuckoo land of “soaring profit and remuneration by dancing with capital and real estate.” Happy endings to all, putatively.

Yet, all of this was nothing but vanity built on shaky ground. It is a Yankee bubble inflated by consumers, regulators, financial players and real estate developers. As interest rates shot up, the bubble ineluctably burst. Hence, Alan Greenspan missed the point when he blamed “an infectious greed” that “seemed to grip much of our business community” for the sub-prime crisis. Wall Street was merely doing what capitalist should do within the FED’s regulatory framework and it is not the root reason of the American economic stagnancy or recession.

Amercias Achilles’ Heel

American consumption spurs imports, hence, its financial crisis and economic recession will impact other economic entities. The more similar a financial system is to America’s and the closer the bilateral relations with America are, the more severe the impact of U.S. turmoil on the economic entity. As such, the U.K., Ireland, France, Iceland and Hong Kong have been affected more than Japan, South America, China and Taiwan. One point to note is that Canada is little affected by the sub-prime crisis because its consumption pattern, financial system and, in particular, housing policy are very different from those of the U.S.

With the united efforts all over the world to resolve the sub-prime blow on the global economy, the crisis could blow over. Some analysis has pointed to a global economic recovery during 2010. However, so long as the Americans stick to their consumption habit, a similar crisis could still erupt, until the dollar is replaced as the global currency and the country as the superpower. It is clear that while the U.S. composite prowess will not be threatened for quite some time, its consumption behaviour is undoubtedly its Achilles’ heel.

Mahatma Gandhi once said “There is sufficiency in the world for man’s need but not for man’s greed.” Americans should realize that their consumption habits were formed in the twentieth century and these were not innate to nature and were not proper. Take energy as an example, the U.S. which accounts for 5% of the global population consumes 25% of world energy consumption. Not so proud.

The U.S. has a lot of strengths, including better self-corrected social mechanism, high quality education, advanced technology and magnetic pull for talent around the world and so on. A recent example is its election of the first colored president. Hence, the U.S. has every right to place itself on the “top of the world.” Nevertheless, the U.S. is offering negative assets to the human race by living on and promoting an unsustainable consumption-led model throughout the world. The model is misleading and conjures up unrealistic consumption desires. In its extreme, the model is a felony which could lead to world destruction.

Xie Li, author of the article, works for Chinese Academy of Social Sciences