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If the domestic private-sector’s desire to save is positive, then the only way for the public sector, i.e. government, to net save is for the economy as a whole to run a sizable current account surplus.

Singapore does just that. Spanning the years 2004-2009, the average current account surplus was near 21% of GDP, which enabled the government to run surpluses near 5% of GDP and the private sector to save 16% of GDP. Singapore is a net-saver in all sectors of the economy: private, public, and international. However, it’s Singapore’s huge current account surplus that allows the domestic sector to net save, and not all financial balances are created equally.

How can any country successfully reduce their public-sector fiscal deficit at the present time? Pretty much any country with private surpluses has a fighting chance, says Rebecca Wilder, Ph.D. Economics in her News N’Economics blog.

Which countries have private surpluses? Some rather interesting ones: Germany, France, the Netherlands, Belgium, the U.K., and even the U.S.A., on the corporate side. 

Let’s use a slightly different version of Rob Parenteau’s 3 Sector Financial Balances Map to illustrate that not all financial balances are created equally.

The chart illustrates the combination of private and public surpluses (or deficits) that prevail at each of three “zones” of the Balanced Current Account Line….  

Read more at newsneconomics.com

The problem is that policy makers can’t just tell the private sector to start dissaving. Well, actually policy makers can do that, but incentives would be necessary to galvanize the private sector into action.

However, even Ms. Wilder concurs that

the economy has a fighting chance if policy does move toward austerity… accompanied by additional U.S. currency de-valuation

Emphasis is mine. Note, THAT will almost certainly require China to loosen apron strings on the Ren Min Bi, allowing their currency to float and increase in relative value.

Indulge me, but this is my more simplistic understanding: A functional global economy is the result of joint efforts made by the participants, all of whom wish to benefit from free trade. Free trade would be impossible if most of the world’s currencies were pegged, or very sticky. Yes, there are reasons for imposing currency controls, and fixing exchange rates. For example, the Bahamas temporarily pegged its currency as a drastic measure for economic recovery in the aftermath of storm-related natural disasters.

Consider The Middle Country, the People’s Republic of China. China wishes to participate in the global economy, with a level of involvement near the very pinnacle. Yet China also wants to retain its fixed-rate currency, effectively claiming the same preferential treatment accorded to a small Carribean nation in extremis. No other country with major international trade and investment activity is indefinitely given preferential treatment. Meanwhile, China has the world’s largest holdings of U.S. Treasury securities. At this very moment, the United States is engaged in a war in Afghanistan. Who do U.S. troops primarily safeguard in Afghanistan. Chinese miners of Afghanistan’s vast mineral wealth, according to the New York Times.

China actually shares a border with Afghanistan. Why isn’t the vast Red Army protecting Chinese miners? How much longer should China be granted a central bank-driven competitive advantage?

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