But China also has an extraordinarily high investment rate, the highest in the world, and this is something that is in principle unlikely to be accompanied by a high trade surplus. After all the current account surplus is exactly equal to the excess of savings over investment, and any country with an extraordinarily high investment rate should

As I will show, some of these responses require an unsustainable increase in debt, and so are temporary. There are, it turns out, two sustainable responses to a forced increase in the savings rate in one part of the economy. The first is an equivalent increase in productive investment. The second is an increase in unemployment.

Deficit country austerity may indeed be part of the correct prescription, but if it is not more than fully matched with surplus-country reflation, it cannot possibly succeed without a sharp rise in global unemployment.

savings. Typically we associate rising interest rates with declining stock, real estate, and bond prices. If most of our wealth consists of these three kinds of assets, then higher interest rates should be associated with a decline in our wealth, and because we feel poorer, we reduce our consumption rate. This seems fairly plausible too. When we

Of course it is not at all clear that a consumption tax or a tariff would leave the total domestic production of goods and services unchanged. This would depend crucially on how the proceeds of that tax are spent. Depending on how this happens, the total production of goods and services can rise, decline, or remain unchanged.

But is there a negative correlation between the two in a financially repressed country like China? Probably not. Most Chinese savings, at least until recently, have been in the form of bank deposits. In a financial system in which deposit rates are set by the central bank, the value of bank deposits is positively, not negatively, correlated with

This was a direct challenge to a core thesis of the classical economists: “Savings are always beneficial because they allow greater accumulation of capital.

Second, the decision by countries like China to buy U.S. government obligations is not a discretionary decision that can be made or unmade at will. Remember that the People’s Bank of China does not purchase huge amounts of U.S. government bonds simply because it has a lot of money lying around and doesn’t know what to do with it. Its purchase of

Anything that reduces consumption, in other words, without changing total production or total investment, must cause an increase in exports relative to imports.