China is doing some major tinkering with fiscal policy according to today's Wall Street Journal. To try to moderate the flow out of bank savings into their stock market, they are decreasing the tax rate on savings from 20% to 10% and increasing the savings interest rate.

This will indeed get people to save more in the banks. But it will also give them more future cash from the lower taxes and higher returns. This may make them more confident about speculating in the stock market. This means that China's mountain of cash will continue to grow. Here's a report that China's savings rate is 55%.

If you think about the combination of pension products (6% to get all the 401k matching seems typical), Social Security (12.4%) and Medicare (2.9%) we are doing a good bit of forced savings. If you add in home equity, most US workers in their prime are socking away 30% if you don't deduct the debt they're taking on.

Our population doesn't have a huge demographic bulge brought about by a one-child policy, industrialization and massive improvements in life expectancy. The upshot is China will have very high savings until the inverted pyramid kids (one kid who is the only kid of two parents who are each the only kids of two grand parents) get to the workforce. They can expect bequests, a healthy mortgage loan market and modern employee benefits. In the mean time, no amount of cajoling from Chinese or American treasury and central banking officials is going to curb the Chinese savings rate much.

The impact means cheap money across the board for another 20 years. According to the CIA World Factbook $180 billion of their savings is going abroad net. Since they get about $65 billion in foreign direct investment, they get to invest almost $250 billion a year abroad.

They have $1 trillion in bank reserves and gold compared to US's $70 billion. They have about $300 billion in government debt or $1.2 trillion at purchasing power parity (PPP), compared to $10 trillion US. China has a vastly undervalued currency with gross domestic product (GDP) PPP estimated at $10 trillion at about 4 times the official exchange rate which puts their GDP at current fixed exchange rates at $2.5 trillion.

In short, with a floating exchange rate, China would have the world's second biggest economy. And that is without the benefit of substantial deficit spending, a stock market, consumer credit, a public pension system up to western standards, a health care finance system up to western standards or any of a number of multipliers that the US already has.

In the next few years, we can look forward to China becoming an economic super power and not slowing its growth (10.7%) until it rises from $7700 per capita PPP GDP to that of Poland ($14k, 5.8%) or France ($27k, 2.1%). That is respectively twice and three and a half times what it is today. With four times as many people that's 2-3 times as big an economy as ours in the next 40 years.

Can the US manage a peaceful decline and start playing the role of junior partner in defense alliances?

I love global Economics.

I'll disagree with this

If you think about the combination of pension products (6% to get all the 401k matching seems typical), Social Security (12.4%) and Medicare (2.9%) we are doing a good bit of forced savings.

The 12.4% for SS and 2.9% for Medicare isn't savings, it's tax. As soon as it's paid the government spends it

True, but you kinda sorta get it back as a subsidy later. In China they don't have either of them so you get a higher savings rate.

Yes but what happens if, as many claim, the money won't be there in another 20 or so years? That's uncomfortably close to my own retirement age.

I don't see how you can call a tax "forced savings" if there is a good possibility that returns won't there when you need them. If it were truly an account with real money and my name on it, I might be inclined to agree.

I'm always a bit skeptical of this kind of prediction. China, for example, has some huge environmental problems as a result of their fast ramp up. The middle class, while somewhat content currently, could become quite restive. The poor already are in many places. There is lots of corruption.

In the past century we've been warned that the German Nazis, the Russian Communists and Japan's businessmen were going to take over the world. Now we're supposed to be afraid of the Chinese. While I think we need to change our ways somewhat, that would be true even if China did not exist.

In short, I'm not ready to panic yet.

How do you know that "real" savings will be there when the crunch is on, especially if those savings are invested in the stock market? How do you know what you are getting back from savings after taxes when taxes can be legislated to whatever.

In a way, the Social Security payout is more secure because there is a vast old-age conspiracy (AARP, etc) lobbying for it (the famous 3rd rail of politics). Savings, however, are suspect because many if not most working-class people are surviving paycheck to the next, and if you have even a little bit of surplus to save, you are considered "rich" by the tax code. Savings of various forms are extremely vulnerable to the Huey Long in many politicians.

A few comments:

On the inverted pyramid, they're already here. The Chinese refer to them as the 124's (one child, two parents, four grandparents). What's worrisome, at least to Western demographers (and, one suspects, Chinese ones as well), is how badly off the "4"s are. These are people who are in their 60s and older. That means they were born at the tail end of WWII (famines, refugee crises), and then lived through the Great Leap Forward (famine) and the Cultural Revolution (massive disruption). These people are NOT in good health.

So what? Well, their social safety net was tied up in the state-owned enterprises that they used to work for---the same ones swept away by the "socialist market economy" that now reigns in China.

That's one reason for the mass savings rate. W/ no children to take care of them (especially if they had girls) and no government social safety net, all they have is whatever they saved.

Yes, they could have a larger economy, based on PPP and exchange rates. Just as Japan's banks were poised to take over the world based on value of deposits, circa 1989. But when you look at the underlying realities of the Chinese economy, it's not quite so rosy.

Deficit spending? The state-owned enterprises that continue to exist are the largest (too big to privatize, too big to fail). These guys are sucking up the capital from China's banks, in the form of "loans" that are really extensions of capital to keep the SOE's meeting payroll. Those are non-performing loans, w/ nary a chance of ever being recouped.

Health care? I'm sure Michael Moore would wax ecstatic over it, but there's a shortage of actual docs. Ever been in a Chinese hospital? Scary place.

And the worrisome part about the 40 year timeframe that Rand notes is that it is almost precisely when the massive demographic bulge hits retirement. What happens when there is one worker supporting 2-3 old folks, rather than 1:1 or even 2:1 (I believe the US is at about 2.5-3:1 workers per retiree).

As one China watcher's noted: China may well grow old before it can grow rich.

It is Sam's post, not Rand's.

I'm always suspicious of "if this trend continues" arguments because no trend survives contact with chaos. Here's an interesting counter-argument about China's superpower status:

http://futurist.typepad.com/my_weblog/2006/05/why_the_us_will.html

Why, so it is!

Sorry Sam, Rand.

Sam: "Can the US manage a peaceful decline and start playing the role of junior partner in defense alliances?"

I'm sure glad you weren't in charge after Pearl Harbor. You sound like Jimmy Carter. You know China is poised to be numero uno in carbon emissions too. We should send Al Gore and tell them to stop. They might laugh themselves to death. How are they going to sustain this growth with sky high energy costs and no technology knowledge base? Coal will only take them so far and they can't steal all the tech knowledge they need.

I was going to let this go but it cries for a comment.
"In a way, the Social Security payout is more secure because there is a vast old-age conspiracy (AARP, etc) lobbying for it (the famous 3rd rail of politics). Savings, however, are suspect because many if not most working-class people are surviving paycheck to the next, and if you have even a little bit of surplus to save, you are considered "rich" by the tax code. Savings of various forms are extremely vulnerable to the Huey Long in many politicians."

Without some intervention, our children and grandchildren will be taxed to death to pay the benefits we boomers are scheduled to receive. So the alterative is lower bennies or raising the retirement age. By 2017, I think, the SS income equals the out go. The only way to make up the difference is out of the General fund and that will require a tax increase or deficit spending.
The more savings you have, the better off you will be.

How are they going to sustain this growth with sky high energy costs and no technology knowledge base?

China is also losing huge amounts of arable land due to salinity from overirrigating, erosion from deforestation, heavy metal contamination, and urbanization.

Without some intervention, our children and grandchildren will be taxed to death to pay the benefits we boomers are scheduled to receive.

And isn't it lucky that almost none of them bother to vote.

Is that what happens when you go to a Starbucks in Beijing?

Is that what happens when you go to a Starbucks in Beijing?

Would you believe that my Iced Grande Chai cost the same amount in Guanzhou (Canton) as it did in Washington, D.C.? At least that's with Visa's exchange rate.

Would you believe that my Iced Grande Chai cost the same amount in Guanzhou (Canton) as it did in Washington, D.C.?

That would indicate that either the Purchasing Power Parity of the dollar versus the yuan is one, or that the Big Mac makes a better index for such things than a Starbucks drink.

I'm sure glad you weren't in charge after Pearl Harbor. You sound like Jimmy Carter. You know China is poised to be numero uno in carbon emissions too. We should send Al Gore and tell them to stop. They might laugh themselves to death.

Y, they have been less sensitive to calls for hamstringing their economy with international community green measures. The West is only planning on $20/ton coal tax/permits so that is only $10 billion/year in a $15 trillion economy in the US. Small beer.

How are they going to sustain this growth with sky high energy costs and no technology knowledge base? Coal will only take them so far and they can't steal all the tech knowledge they need.

Coal is dirt cheap. They have nukes. They can read. They don't have to get to our level of per capita GDP, only Poland's or Frances which only requires copying what we did in the 1970s and 80s. That will get them sufficient R&D money to invent what they can't steal. The Soviets kept up with the West with a much lower GDP. China if it has a per capita GDP half of the US's will have twice our GDP. Is that gap too big for democracy and a decades-long head start to overcome?