FOR MOST OF THE LAST TWO GENERATIONS, the global economic system operated under a paradoxical division of labor. Americans consumed, while Asians--and much of the rest of the world--saved. The vast American consumer market helped drive the whole world economy. But since Americans were spending at such a prodigious clip, they weren't able to save much. That created two problems: There wasn't a lot of capital for business investment and even less to make up for the country's huge current account deficit--a function of our buying more from foreigners than we sell them. That's where the saving of the rest of the world came in. Foreigners saved so much that they had plenty of capital to invest--and where better to invest it than in the galloping, consumer-driven American economy?
Foreign investors, banks, and other companies purchased American equities, treasuries, and greenbacks, and invested in the United States (According to a recent Merrill Lynch report, the United States absorbed nearly three-quarters of the savings of the world's major industrial countries in 2002.) This inflow of foreign capital has kept America's current account deficit stable and U.S. inflation low, making it easier for American consumers to keep on buying. Asians, meanwhile, needed our consumption-driven economy because their export-driven economies thrived on Americans who spent every dollar they earned, and then some. This division of labor may have been morally dysfunctional. But as a global economic order, it worked like a charm.
Of course, economists long warned that the system was inherently unstable. If foreigners suddenly lost faith in the U.S. economy and pulled out their billions, the market would bid the value of the dollar down dramatically. Indeed, since the stock market bubble burst in 2000 that's already begun to happen. In the last two years, foreign investment in the U.S. economy has plummeted to levels last seen in the early 1990s. With America at war against terrorism, anxious economists now worry that rising anti-Americanism or just the war-induced strains on the American economy could prolong the foreign investment drought or dry it up even more, leading to a sharp devaluation of the dollar, and perhaps even a cycle of worldwide recession.
There's no way to predict if any of this will come to pass. But the crux of the problem is that these possibilities remain outside America's control. The only way to truly solve the problem is for Americans to save more at home or sell more goods and services overseas. Ironically, though, what may bring the whole system crashing down once and for all is one of America's own most rapidly growing exports: credit cards.
Sticky Rice, Stickier Debt
Until the mid-1990s, consumers outside North America and Western Europe rarely ran up large amounts of personal debt. With the credit card market in the developed world still growing, big credit card companies did not focus on the developing world (which includes most of Asia). Countries like Thailand still hadn't developed large populations of middle class consumers. But traditional mores also played a role. In Asia, where people historically considered saving an important virtue and conducted nearly all transactions in cash, personal debt was less a fact of life than a source of shame. As recently as the mid-1990s, South Koreans saved more than 30 percent of their GDP, while Americans struggled to save a measly 1 percent (though U.S. home values and ownership rates, a form of savings, did rise).
For a variety of reasons, however, the situation has recently begun to change. As some developing countries boomed during the 1990s, they germinated millions of new middle- and upper-class consumers who had more capital and more desire to purchase consumer goods and their own homes. Many of these new consumers were under 40--men and women less tied to traditional mores of saving. Many had traveled in North America and seen how Americans easily obtain loans, sign mortgages, and whip out credit cards. After the Asian financial crisis of 1997, which depleted much of the savings of this new middle class, credit was often the only way to keep buying.
At the same time, the late-1990s financial crises prompted Asian, Latin American, and Eastern European governments to try to stimulate domestic consumption to boost national growth rates. Two key ways to do that were to lower rates of interest and ease the regulation of credit. Over the last three years in Thailand, Prime Minister Thaksin Shinawatra has toured the country to encourage Thais to spend more. In South Korea, the government has called on Koreans to borrow as much as possible. In China, the state has gone so far as to create whole new national holidays to give citizens more time to shop.
Meanwhile, intensive lobbying by banks, finance companies, and credit card firms has prompted governments to lower the minimum-income bar for credit cards and other consumer loans. For the lenders, the motivation was obvious. Credit-card operations can generate returns of more than 50 percent, since card issuers often charge interest rates of more than 20 percent. As Noam Neusner noted in U.S. News and World Report, "for banks, personal, unsecured loans--[i.e. issuing credit cards or personal loans to people who are a high risk not to pay their balance] represent one of the most profitable niches." And as markets in the developed world became saturated, debt issuers turned to the developing world to keep their profits rolling in.
This crucial deregulation has allowed banks and card companies to pursue a wider range of clients, many of whom have minimal savings and no credit history. In South Korea, for example, it has become so easy for lenders to issue credit cards that the local media reported last year that banks had mistakenly given household pets--which could hardly have a credit rating--their own credit cards. In golf-mad Thailand, card issuers have offered free links lessons. And credit-card issuers have pursued similar tactics across Latin America and Eastern Europe.
Foreign governments and global lenders have both tried to encourage developing world consumers to open their wallets and global consumers have happily obliged. Until recently, credit cards were unheard of in China. Today, however, Chinese use plastic for more than $200 billion worth of transactions annually. India and Indonesia reported major increases in mortgage applications, consumer loans, and credit card purchases in 2002. Across Asia, Visa International increased the number of cards issued by 25 percent last year alone, and cash withdrawals using Visas rose by 44 percent. According to The Economist, households now account for nearly 40 percent of East Asian banks' total lending, up from 27 percent in 1997.
Thailand and South Korea have become even more obvious examples of American-style spending. Visa says that total spending on its cards in Thailand is rising by more than 40 percent annually. In South Korea the story is the same. As one South Korean told The New York Times in December, the average Korean worker now carries four credit cards (more than 10 million South Koreans carry four or more, while the average bank worker carries between 10 and 15). Meanwhile, consumers in Eastern Europe, Latin America, and even Africa have actively followed suit. Schroder Salomon Smith Barney, an investment bank, estimates that between 1997 and 2001, household lending in Hungary, Poland, and the Czech Republic rose by more than 25 percent. As The New York Times recently reported, Russians also are beginning to utilize debt to pay for mortgages and large appliances. Household spending in South Africa, the biggest economy in Africa, has soared since 2000. And while Latin America has been hit by a series of financial crises from which, unlike Asia, it has not completely recovered, consumer spending--especially spending on credit--is rising there as well, in the region's more developed economies.
Extra Credit
