The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- In my last article, I wondered how the authors of The Way Forward could completely ignore the role of banks as contributors to our global economic malaise. In this piece, I will look at their recommendations on what needs to be done globally to rectify the situation. Capital Flows: The authors of the study, Daniel Alpert, Robert Hockett and Nouriel Roubini, or AHR, argue that capital inflows from emerging market countries contributed significantly to the U.S. housing/spending bubble that burst in late 2008. They assert further that a significant portion of those capital inflows came from emerging market governments (primarily China) trying to keep the U.S. dollar strong, so as to give their exporters a competitive advantage. They are critical of "China's continuing policy of pegging the yuan to the dollar." There are several problems with these assertions. U.S. Capital Inflows: Table 1 gives data on foreign government and private investments in the U.S. for the 2000-2007 period. While foreign governments purchased $1.4 trillion of U.S. government securities during this period, the foreign private sector purchased far more, $3.8 trillion, with most purchases being equities.
AHR Recommendation 1: Emerging market countries have the responsibility to stimulate consumption and reduce their savings rate by developing "safety nets." "Because China lacks a real safety net and does not have reliable public systems of health care, retirement and education, Chinese workers are engaged in precautionary savings for these purposes. The best way to reduce this precautionary saving and augment demand would be to encourage China to do a better job of both providing education, health care and retirement for its citizens."
2. China does not want to have a safety net like that of the U.S. The U.S. spends far more on health care than any nation in the world and it ranks at the bottom of all OECD countries on quality of care. If having a safety net and no "precautionary savings," in part, caused the U.S. real estate/consumption bubble resulting in the global recession, no thanks. In China, we believe some individual "precautionary savings" are good. AHR Recommendation 2: Chinese wages are too low. They should be increased. "One way to correct the imbalance that results would be for China to allow wages to grow faster than productivity to boost labor income and thus increase purchasing power for consumption goods. This would also have the benefit of reducing the race to the bottom in labor costs and would allow wages and incomes to grow in other economies."
During the last 15 years, much effort went into developing the infrastructure for a modern nation. Today, the consumer demands of the middle class are growing rapidly. Our projections are that in less than a decade, we will no longer be running a trade surplus. We do not want to become as indebted and as dependent on the rest of the world as the U.S. has become. Consequently, we are not willing to increase wages and consumer demand to help bail out Western nations for their mistakes. AHR Recommendation 3: China's export subsidies must be eliminated. "Export subsidies to industry in China and other surplus nations constitute another significant drag on demand, and of course, contribute directly to the oversupply problem in the world economy. Essentially, for those reasons, they are also illegal under WTO treaty and case law. Export subsidies, accordingly, must be steadily and expeditiously phased out."
2. The U.S. government's experience with investing reserves is limited. After all, its reserves are only $131 billion, while China has almost $3 trillion. To help with its investments, China has hired what it believes to be the best financial strategists in the world. 3. Until and even after the U.S. bank collapse, the U.S. foreign assistance agency, or AID, was urging all developing countries to increase their banks leverage, citing an outdated study that said greater leverage could increase developing countries' growth rates. Conclusion: The Chinese government has done an amazing job over the last three decades to generate growth and reduce the poverty of its people. It has taken a lot of hits from the West for its policies, many of which are uninformed. Over the next decade, the Chinese government has the very difficult challenge of moving from being an export-driven country to one that must satisfy the demands of its growing middle class without running up a large trade deficit. It will not be easy.