The June 30 Quarterly Report from Platinum Asset Management’s European Fund contains some great insights and here’s an excerpt that I find particularly interesting.
“Consider for a moment our own experience, as Australians, participating in this economy over the last thirty-odd years:
- We have enjoyed a period of unprecedented economic stability. We have not experienced a recession in 26 years. This is now officially a world record.
- During this time unemployment has been relatively low. Employers consistently complain of the difficulty of finding suitably skilled workers and lobby for more skilled migration. Our job security is high. Our prospects of finding employment are good.
- Reflecting this, wages have grown faster than inflation with Australian incomes now very high by international standards.
- House prices have appreciated phenomenally over this period. We have generated more wealth through capital gains on property than we ever could have by working and saving.
This experience has conditioned us to be confident about the future. We are confident enough to spend more than we earn. We are confident enough to take on a lot of debt. We are confident enough not to feel the need for precautionary savings. We feel wealthy.
This experience is what a current account deficit economy feels like.
Now try and imagine the world through German eyes over the same thirty-year period:
- They endured not one but four recessions; one every seven years on average and two in the last decade alone.
- In 1990, 16 million East Germans joined their economy. Businesses were spoilt for choice, but for workers it meant two decades of high unemployment, low job security and poor prospects of finding employment.
- Reflecting this, inflation-adjusted wages did not increase at all between 1990 and 2010. That’s twenty years without a pay increase.
- Many Germans own their homes, but inflation-adjusted house prices went sideways from 1980 to 2010. That’s thirty years with no capital gain to speak of.
This experience has conditioned Germans to be cautious. They are miserly with their spending. They eschew debt. They hold significant precautionary savings. They invest their savings in bank deposits, not property and shares. Make no mistake, Germans are well of. But they got there the old-fashioned way. Slowly! By working and saving.
This experience reflects what a current account surplus economy feels like.
For over three decades, countries like Japan, China and Germany have generated large surpluses of savings. These were channelled by capital markets to deficit countries where they enabled households, businesses and governments to gear their balance sheets. This fuelled asset price booms in deficit countries and allowed households to live better and spend more than their own incomes would allow.
This is the world as we have known it for three decades. But it’s changing.”
Both surplus and deficit countries need to get as close as possible to having a neutral current account to avoid continuing to worsen existing global imbalances. The thing is, it’s relatively easy for a surplus country to learn to spend more on themselves to achieve the neutral state, but it would take tremendous pain for a deficit country to learn to tighten their belt to get to the same state.