this financial crisis at least taught us some basic economic principles worth keeping in mind. These principles are well grasped even among uneducated people, but our elites, especially we economists, have almost forgotten them.
1. It is not sustainable to spend twice what you earn.
2. Eventually you’ll have to pay what you owe.
From these two principles follow several deductions:
1. Even the best printing machines cannot print wealth, although they may churn out new notes.
2. If someone asks you for a loan and promises he will print money to pay you, hold tight to your wallet.
3. It’s also up to you as a lender to realize that if you hand out too much cash, borrowers will have to default.
4. Moreover, refinancing can drive debts higher. Without a solid base of production, financial innovations can only create numbers, not real wealth.
The U.S. takes advantage of the dollar standard, ignoring credit expansion and massive debt, to enhance domestic consumption levels that have outpaces incomes for years. According to George Soros, the prosperity from the credit bubble lasted for 60 years and has just come to an end.
In 2007, consumption accounted for 86 percent of the U.S. GDP; the ratio of net savings to disposable income was negative 1.7 percent; while the trade deficit equaled 5 percent of GDP. In 2008, the debts owed by the U.S. citizens, governments and non-financial businesses amounted to US$ 33 trillion, 2.3 times the GDP. If you spread that figure out over the entire population, including the young generation, each U.S. citizen bore a debt of US$ 110,000.
Unlike the U.S., the net savings ratio in China is 43 percent. China has a foreign exchange reserve of 2 trillion dollars. This sizable fortune came from the hard work of 1.3 billion Chinese. With this money, we can improve our social welfare and secure our development. But is this foreign exchange reserve secure wealth?