Irresponsible Lending

By Ramesh Akkineni

from an article in Financial Express

'Economists and others find it easy to berate the Americans for their profligacy. It is certainly not without basis. Nonetheless, excess frugality and funnelling those savings to a nation with a GDP of around $12 trillion, while one’s own nation is beset with a much higher incidence of poverty, is equally irresponsible macro-economic policy. In effect, that is what Asian nations have been doing over the last few years. They are lending their excess of savings over investment to America, so that its consumers would absorb greater volumes of Asian exports.'

'This reminds one of the story of a bartender pouring one drink after another for his solitary customer and getting him inebriated in the process. At some point, the customer would either fall unconscious, or his liver would be damaged beyond repair, so that he would have to quit drinking. And the bar, with that one customer, would be forced to close down. '

'Asia finds itself in that situation. Not wanting to think about the day when its only customer would stop spending, Asian central banks are happy to go on lending to America.'

'More importantly, the American consumer is likely to be pushed further into the negative savings territory, as his reliance on home price appreciation has been further aggravated with the recent drop in yields. Thus, an over-extended American consumer, sitting on top of a bloated and bigger housing bubble, would be a classic target for a free fall at the first sign of any negative demand shock—a rebound in the price of oil, or a market revision of US interest rate expectations.'

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