When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts.
If high-consumers (low savers) become as virtuous as low-consumers (high savers), that just means that global demand will decline, and with it, global unemployment will rise. In that case global savings won’t go up. They will go down, since rising unemployment causes income to decline faster than consumption.
With crude oil increases, it should come as no surprise that the trade balance should have grown in December 2010. But some aspects are also trending lower.
The Chicago Fed National Activity Index (CFNAI) was up slightly in December; However December releases are usually revised significantly in subsequent months. We will not be sure of the reading until perhaps March.
Efforts of China to increase domestic consumption are thwarted by a very high household savings rate.