"They rush about in disorder, anxious slaves of the three M's - the moment, the mode, and the mob. They see too well their want of dignity and fitness, and need a false elegance to hide their galloping consumption..."
- Friedrich Nietzsche, Thoughts Out of Season II: The Use & Abuse of History (1874)

NOW THE banking crisis is over - "Bernanke stays put, home prices up," as Fox News reports - the career academics who failed to spot and prevent it can get back to fretting about the most macro of tasks:

How to rebalance the global economy?

The rich West spends, emerging Asia saves. For global trade, this means the West (or rather the US, UK and most of Western Europe) goes shopping for what Asia (and Germany) makes. Which in turn means poor Asia in fact funds this consumption, hoarding Treasury bonds as I.O.U's, representing the ultimate in vendor finance.

Like the subprime and mortgage-bond bubbles, this situation will run for as long as it runs. Then one day, quite suddenly, it won't, thanks either to Western consumers refusing to wear further debt, or Asian savers refusing to hoard any more paper. Classical economics says Mr.Market could also call time, driving a sharp decline in the Dollar and Sterling and making Asian imports too expensive for West consumers to buy. (The Euro's more sticky; the single currency covers both export-rich Germany and chronic trade-debtor Spain. But that's another crisis-in-waiting altogether...)

None of these outcomes appeal to Beijing or the Washington Beltway, however. Letting the Dollar sink versus the Yuan would destroy the value of China's $1 trillion of state-savings held in US Treasury bonds; it would also force a surge in US inflation, driving up interest rates on Washington's $11 trillion debt. A collapse in US consumer spending, on the other hand - well over 70% of the annual economy since the start of this decade - would do to malls nationwide what Toyota did to Detroit in the '80s. And who would then step up to buy Asia's exports?

"A door-to-door survey of 6,000 Chinese households revealed a strong near-term appetite for consumer goods," reported McKinsey consultants in 2006, "[but] it also suggested a considerable wariness that could influence the behavior of shoppers.

"Just 37% of those surveyed, for example, agreed or strongly agreed with the statement 'I feel confident about my financial future.' The respondents also confirmed that they saved a quarter of their family income - vastly more than people in Europe and the United States save."

This savings glut, as Ben Bernanke called it in 2005, was equally cast as a consumption deficit. As early as 2004, McKinsey (again) warned that "Weak consumer spending in China is emerging as a big obstacle to the country's sustained growth." Five years and 81% growth in GDP later, McKinsey's still at it:

"China may have extra domestic consumption worth $1.9 trillion by 2025, if the government adopts more aggressive reform programs covering a wider range of financing policies, job-driven investment projects and a stronger social safety network, according to a report released by global consultancy firm McKinsey," says the China Daily. And for once, Beijing is ahead of the consultants, boosting - or at least reporting - a surge in consumer spending.

6 May 2009: Consumption stimulus plan takes initial effect
"The Ministry of Commerce has demanded carrying out holiday activities such as shopping festivals, travel festivals and carnivals...During the Labor Day holiday, thousands of domestic retail enterprises achieved sales volume of 1.20 billion Yuan [$175m], up 9.0% year-on-year...Promoting cultural and travel consumption is also one of the ministry's top concerns [and] travel expenses during the Labor Day holiday exceeded 420 million Yuan [$61m], an increase of 40%; food and beverage sales reached 42.26 million Yuan [$6.2m], up 20.3%..."

14 June 2009: Premier stresses expansion of domestic consumption
"Wen Jiabao stressed the importance of promoting domestic consumption and independent research and development during a three-day inspection tour in the central Hunan Province. [He] said the key to a sound economic future lay in continuing to "unswervingly" implement the government's policies to deal with the international economic downturn..."

11 Aug. 2009: China to spur consumption with 33 billion Yuan
"The [$4.8bn] fund will be used to support the rural home-appliance subsidy program and the auto sector's trade-in subsidy program. The fund will also be used to establish a rural market system, and to support the urban service industry and small and medium-sized trading firms..."

All told, the Chinese government is hell-bent on mobilizing its citizen's "glut" of savings. (That's Communism for you!) But as the breadth, not to say panic of such policies also shows, "There is no single magic bullet for shifting [China's] growth away from an excessive dependence on exports and investment," in the words of a US economist.

"A number of complementary policy measures are needed to boost private consumption and make growth more balanced," writes Professor Eswar Prasad, senior fellow of the Brookings Institution. "This will improve the welfare of Chinese citizens and also contribute to global financial stability."

A dream big enough for Angelina Ballerina, saving the world faces an ugly problem, however, according to McKinsey. And given their experience in urging China to spend! Spend! SPEND! we guess here at BullionVault they might have a point.

"The source of the low consumption is both behavioral and structural," the consultants' latest report warns. In particular, Chinese citizens are "focused on savings" because they lack "adequate health insurance and government- or employer-sponsored programs after retirement" - according to Chen Yougang, a partner at McKinsey.

In other words, the lack of any social security - those government promises that save Western consumers the trouble of saving - means China's citizens still need to provide for their future, rather than banking on tax receipts paid by their children and grand-kids. Moves to start providing a cradle-to-grave safety net "are important," says Alex Peng, a principal at the firm, "but the efforts cannot take off until after 2025, and the impact on boosting consumption is the least compared with other factors."

We don't doubt the communist Beijing government's desire to nationalize health-care and pensions. They need only glance at the "free market" models at work in Europe and the US for encouragement. But BullionVault doubts the time-frame in which social security might spur a true consumer bubble on mainland China. Taking the UK for instance, the slow move from Fabian well-wishing to official policy with the People's Budget of 1909 took more than four decades. "Homes Fit for Heroes" - and the concomitant tax rises after WWI - sped up the process of course, but it wasn't until the end of WWII that the welfare state became "universal". From there, it took another 55 years before the promise of "cradle-to-grave" care became so relied on, it underwrote a collapse in private provision that crushed household savings below 5% of disposable income.

China's got a long way to go to lose the saving habit, in short. And amid its latest bubble in state-funded programs and private-bank credit, little wonder Chinese investment in gold is surging.

More to come in Part II...