No doubt, we are in the process of correcting the global imbalances, but don’t forget to ask the fundamental question, “Why developed countries aren’t saving? Why do developing countries tend to save too much?”

Let’s first look at the chart below:

The chart shows that with the exception of Canada, the savings rates in almost all developed countries have declined over time and remain well below 10%. In contrast, China’s saving rate is around 40%.

My 2 seconds in thinking about this question:

1. Savings rate is tied to country’s development level, especially in two aspects:
1) level of financial system development — i.e., whether consumers have relatively easy access to credit;
2) welfare system — i.e., whether a country has the basic social security and healthcare system, and whether her citizens feel safe NOT to save for precautionary purpose.

2. Saving is habitual in nature, and its level tends to persist and can’t be adjusted overnight.

What are the implications? — It’s naive to expect Chinese to jump start their consumption soon, not in five years, at least; for the same token, it’s premature to predict that Americans will increase their savings rate dramatically. It’ll be nowhere near, say 10% level. American consumers will certainly spend less because credit is harder to come by these days, but I don’t expect a dramatic jump in savings rate. Saving is the last thing government wants you to do anyway (“Paradox of Thrift”, anyone? )