Twofish's Blog

November 17, 2009

Not such a mystery

Filed under: Uncategorized — twofish @ 11:01 am

It’s actually not a mystery why Chinese companies (and households) hoard cash. The problem is that they cannot be guaranteed bank loans when things go bad, so they end up with massive amounts of cash which they can spend if things go bad.

I really don’t understand why this is a bad thing. It’s not as if companies are literally piling away paper in vaults. When Chinese companies save, this goes into bank deposits which the banks can lend out for infrastructure improvements.

Personally, I think that given that macroeconomic theory is a mess, when macroeconomists say that China should save less and spend more, and that China is doing an obviously stupid thing by undertaking the policies that it has, then we really ought to question the assumptions of the macroeconomists.

The problem with discouraging savings is that it assumes that companies will always be able to get funding when they need it, so when funding breaks down, you have a major crisis in the United States that you really don’t have in China. When a company in the US loses bank financing, then it has to immediate lay off workers, whereas Chinese companies have enough cash to keep workers employed while the government figures out what to do and while stimulus starts going on line.

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