Based on recent headlines, you might think that Americans are finally saving again. Want to bet?

In 2007, the latest year for which final numbers are available, Americans spent $92.3 billion on legalized gambling, according to Christiansen Capital Advisors; that same year, says the U.S. Bureau of Economic Analysis, Americans saved only $57.4 billion.

So, if Americans are to save more, maybe we should make saving feel more exciting than just a dull deposit into a bank account.

The BEA recently estimated that personal saving — what is left of Americans’ disposable income after all our spending — has risen to a 6.9% annual rate. Starting in the late 1980s, the personal-saving rate began to fall from the 8%-to-10% range. By 2005, households were spending 99.6 cents of every dollar they earned. Now, however, frightened by foreclosures and menaced by rising unemployment, Americans are saving almost as much as they used to.

CHINESE growth was already the envy of the world. Now recession-stricken countries will be turning an even brighter green. On July 16th new figures showed China’s GDP growth quickened to 7.9% in the year to the second quarter. That is healthy enough by anyone’s standards but the headline number conceals a more astonishing rebound. Goldman Sachs estimates that GDP grew at an annualised rate of 16.5% in the second quarter compared with the previous three months (see chart 1). Over the same period, America’s economy probably contracted again. China’s economic stimulus has clearly been hugely effective. So effective, indeed, that some economists are now worrying it may be working rather too well.

In the year to June fixed investment surged by 35%, car sales rose by 48%, and purchases of homes by more than 80%. After falling last year, home prices are now rising briskly in some big cities, and share prices have soared by 80% from their November low. Domestic spending has been spurred partly by the government’s stimulus package, but probably even more important was the scrapping of restrictions on bank lending late last year. In June new lending was more than four times larger than a year earlier (chart 2).

One reason why the economy has rebounded so quickly is that much of the slowdown was self-inflicted, rather than the result of America’s economic collapse. In 2007 concerns about overheating prompted the government to curb the flow of credit for construction and home buying. This caused China’s economy to slow sharply even before the global financial crisis. Then, last November, the government turned the credit tap back on full.

That has given a big boost to domestic spending but raised concerns that the flood of liquidity will push up inflation, fuel bubbles in shares and housing, and store up bad loans. The M2 measure of money surged by 29% in the year to June. In fact the risk of high inflation in the near future appears low: Chinese consumer prices fell by 1.7% in the year to June, and spare capacity at home and abroad is holding down prices. But asset prices could be a bigger danger. According to one estimate, 20% of new lending went into the stockmarket in the first five months of this year.

It is probably too soon to use the word “bubble”. The stockmarket is still at only half its 2007 peak and, although house prices have risen sharply this year in Shanghai and Shenzhen, the nationwide average is barely higher than it was a year ago. But the pace of bank lending is unsustainable, and America’s recent experience suggests that it is better to prevent bubbles forming than to mop up the mess afterwards. Several officials at the central bank have said lending should be curbed.

At the moment, the prime minister, Wen Jiabao, is signalling that he wants monetary policy kept fairly loose. Exports remain weak and the government fears premature tightening could derail the recovery. It is also keen to create jobs and maintain social stability in the months before the 60th anniversary of Communist Party rule in October.

Still, the central bank has begun to tug gently at the reins. It has nudged up money-market interest rates and warned banks that it intends to increase its scrutiny of new bank loans. The China Banking Regulatory Commission has warned banks to stick to rules on mortgages for second homes, which require a down-payment of at least 40% of a property’s value.

The recent rebound in house sales is, in fact, exactly what the government is aiming for, since it is using property as a way to spur private consumption. Higher house sales encourage more spending on furniture and consumer appliances. Construction also creates lots of jobs; indeed, it employs almost as many workers as the export sector. Since October the government has encouraged people to buy houses by cutting the minimum mortgage down-payment on their main home from 30% to 20% and by reducing stamp duty and other taxes on property transactions. Stronger sales are now feeding through into new house building: housing starts rose by 12% in the year to June, the first growth in 12 months.

Given the importance of property to domestic demand, the government is highly unlikely to want to clamp down hard on the housing market. Despite the recent lending boom, Chinese banks’ mortgage lending is still very conservative compared with that in America—at the peak of America’s housing bubble it was easy to get a mortgage for 100% or more of the value of a home. Nevertheless, the lesson of America’s financial crisis for China’s government is plain: overly loose lending should never be ignored.

Congress wants to lower Wall Street bonuses, blaming them for encouraging the excessive risk-taking that helped cause the financial crisis. But the haphazard way that pay practices are being altered may yet yield the worst of all worlds, higher fixed costs and less accountability, without removing the threat of talent walking out the door.

Banks like Citigroup and Bank of America that still have funding from the Troubled Asset Relief Program are dealing with restrictions on the bonuses they can pay top employees. To keep the rank and file happy, Citigroup is raising base salaries for many of its 300,000 employees who are eligible for a bonus. Morgan Stanley also has increased base pay, from about $300,000 to $400,000 for managing directors. Even stronger performers, such as J.P. Morgan Chase, are considering raising base pay. Credit Suisse is considering all options.

The result: higher fixed costs, even as many banks continue to struggle. When guaranteed salaries rise, so do a range of juicy benefits, as well as severance packages, which are based on salaries. With banks facing increased regulation and higher capital requirements, reducing flexibility on pay could be another blow to investors.

There also is a question of whether higher cash salaries really will mean lower bonuses. The danger is that, even if the likes of Goldman Sachs Group pay out less than half of net revenue in compensation, less-profitable firms might feel forced to pay out a higher portion to keep up. Goldman said it has no plans to adjust the way it pays employees; stars will continue to receive the bulk of pay in bonuses tied to performance.

A perverse outcome of the Wall Street crisis is that compensation as a proportion of revenue could actually rise. Pearl Meyer, of Steven Hall & Partners, estimates that Wall Street pay will end up topping 60% of revenue for the foreseeable future, up from about 50% in past years. It could hit 70% at some smaller financial firms, she said.

To be sure, the "comp ratio" mightn't stay at elevated levels as revenue improves. Morgan Stanley said its payouts looked high in the first quarter because movements in the price of its debt reduced net revenue. Banks said bonuses will be trimmed to keep overall compensation about the same.

Citigroup said its changes were aimed at reducing the focus of employees on short-term results and keeping more of them at the bank for the long haul.

But salaries are paid in cash, while bonuses are usually in cash and shares that vest over time. More cash upfront arguably gives them fewer reasons to stick around or worry about the long-term performance of their firms. At the same time, bonuses aren't going away, so some traders and bankers will continue to embrace risk to try to score the highest payouts. A rise in base pay might help retain middle-performing staff, but it is unlikely to attract or retain the best traders and bankers.

The crisis should lead to a more rational pay structure on Wall Street, with pay remaining flexible and bonuses paid largely in stock that can be clawed back if necessary. Instead, as salaries rise and guaranteed bonuses start to make a comeback, Wall Street firms risk adopting a new set of bad habits.

DESPITE falling exports, China’s economic growth has remained relatively strong this year thanks to a surge in investment sparked by the government’s stimulus measures. Official data show that fixed-asset investment leapt by an astonishing 39% in the year to May, or by a record 49% in real terms. Sowing more today should yield a bigger harvest tomorrow, but how wisely is this capital being used?

Official figures almost certainly overstate the size of the spending boom: local bureaucrats may well be exaggerating investment in order to impress their masters in Beijing. More important, the government’s figures misleadingly include land purchases and mergers and acquisitions. But even if measured on a national-accounts basis, like GDP, investment is probably growing at a still-impressive real annual rate of around 20%. This year China’s domestic investment in dollar terms is likely to exceed that in America (see chart).

There is widespread concern that this investment boom is adding to China’s excess capacity. Investment amounted to 44% of GDP last year (compared with 18% in America), which many economists reckon was already too much. Worse still, as well as forcing state firms to invest, the government is directing state-owned banks to lend more, despite falling corporate profits. Many of those loans could turn sour. Like Japan in the 1980s, it is argued, an artificially low cost of capital causes chronic overinvestment and falling returns. If so, it will end in tears. To assess that risk you need to ask two questions. How much excess capacity was there already? And where is the new investment going?

There is certainly excess capacity in a few sectors (steel and some export industries, such as textiles). But the best measure of spare capacity for the economy as a whole—the difference between actual and potential GDP, or “output gap”—is probably only about 2% of GDP, compared with an average of almost 7% in the rich world.

The large role played by state-owned banks is bound to have resulted in some misallocation of capital, but a recent study by Helen Qiao and Yu Song at Goldman Sachs argues that concerns about overinvestment are exaggerated. A successful developing economy should have a high ratio of investment to GDP. And a rising rate does not mean that the efficiency of capital is falling; capital-output ratios are supposed to increase as economies develop. America’s capital stock is much larger relative to its GDP than China’s, with 20 times more capital per person than in China.

A better measure of capital efficiency is profitability. Profits have indeed slumped over the past year, but taking the past decade to adjust for the impact of the economic cycle, profit margins have not narrowed as one might expect if there were massive spare capacity. The argument that the average cost of capital is ludicrously low is also no longer true. China’s real interest rate is now 7%, which is among the highest in the world.

Where is the new investment going? There has been little new spending in industries with overcapacity, such as steel and computers. But the surge in state-directed investment has fuelled fears about its quality. In its latest China Quarterly Update, the World Bank calculates that government-influenced investment so far this year was 39% higher (on a national-accounts basis) than a year earlier, while “market-based” investment rose by a more modest 13%. This implies that government-influenced investment accounts for about three-fifths of the growth in investment this year, up from one-fifth last year.

The usual assumption is that government investment is less efficient and will therefore harm long-term growth. But the fastest expansion in spending has been in railways (up by 111% this year). As a developing country, China still lacks decent infrastructure; railways, in particular, have long been an economic bottleneck. Investment in roads, the power grid and water should also yield high long-term returns by allowing China to sustain rapid growth.

And the government is focusing its infrastructure stimulus on less developed parts of the country where the benefits promise to be greatest. According to Paul Cavey at Macquarie Securities, fixed-asset investment in western provinces was 46% higher in the first four months of this year than in the same period of 2008, almost double the rise in richer eastern provinces.

Some of the money being spent in China will inevitably be wasted, but it is wrong to denounce all government-directed investment as inefficient. In the short term it creates jobs, and better infrastructure will support future growth. It is certainly not a substitute for the structural reforms needed to lift consumer demand in the longer term, but it could help. After all, without running water and electricity, people will not buy a washing machine.