Saving deficit, not China, threatens American dream

The US, however, is headed in the opposite direction. There is no interest in debating the saving issue, let alone implementing policies to address it. A pro-saving US policy agenda should draw on the following: longer-term fiscal consolidation, expanded individual retirement accounts and 401Ks, consumption-based tax reform (such as value-added or sales taxes), and interest-rate normalization. Instead, US politicians continue to focus on keeping the consumption binge going, regardless of its implications for the US' saving imperative.

The asymmetrical response of the world's two largest economies to their respective saving dilemmas has far-reaching consequences. To the extent that China makes progress on the road to consumer-led rebalancing, it will shift from surplus saving to saving absorption. Already, China's gross national saving rate has declined from a peak of 52 percent of GDP in 2008 to around 44 percent this year. It should fall further in the years ahead.

The US, long locked in a codependent economic relationship with China, cannot afford to ignore this shift. After all, along with reduced current-account and trade surpluses, China's consumer-led shift to saving absorption likely entails diminished accumulation of foreign-exchange reserves and reduced recycling of those reserves into dollar-based assets such as US Treasuries.

To the extent that America fails to boost its domestic saving, the lack of Chinese capital may well force the US to pay a steeper price for external financing, through a weaker dollar, higher real interest rates, or both. Such are the classic pitfalls of codependency: when one partner alters the relationship, there are consequences for the other.

No country can prosper indefinitely without saving. Holding the world's reserve currency, the US has gotten away with it, largely because the rest of the world let it. After all, the enablers－especially export-led economies like China, along with its resource-dependent supply chain－benefited from the US' consumption binge, as it drove an outsize expansion of global trade.

But those days are numbered. US voters－especially disenfranchised, angry middle-class workers－increasingly recognize that something does not add up. Yet US politicians continue to deflect the electorate's anger outward, dismissing the growth subsidy that accompanies the "kindness of strangers". It is time for politicians to own up to the uncomfortable truth: The saving deficit is the single greatest threat to the American dream.

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.