symbol of the Chinese economic menaceI teach English to Japanese students in my spare time.  I had a student today who wanted to talk about the Lehman shock, the sub-prime loan crisis, and China.  The student was of the high-intermediate variety and ignorant of economic terms, so the resulting explanation was in simple (oversimplified?) language.

The student asked me about the difference between savings and investment.  I told her savings basically means doing nothing with your money.  Investing is buying something that will make you money in the future: a car can be considered an investment, and even a "savings" account is actually an investment.  Saving is basically a waste, but it's necessary to save a little in case investments turn sour. 

We modeled a typical Japanese family's use of a thousand dollars and a typical American family's use of a thousand dollars.  The Japanese family spent 400, saved 400, and invested 200.  The American family spent 700, saved zero, and invested 300.  The strengths of the Japanese model were that it was safe but wasteful, whereas the American model produced high growth, but was more dangerous than the Japanese one. 

My student had trouble understanding the concept of a mortgage.  I explained it to her through an example.  If a house I want to buy costs $100,000 and my annual savings are $10,000, I can either wait ten years and buy the house, or I can take out a mortgage, which means I make a down payment of, for example $30,000 and then pay 1% of the remaining balance everymonth until my remaining balance plus interest are paid off.  This way, I can live in my house after only three years instead of ten.  Whichever bank sells me my mortgage plan actually owns the house, so if I can't make my monthly payments, the bank takes my house. 

Due to central bank policy which encouraged perpetually rising real estate values, it became in the interest of less-scrupulous banks to lend to people who could not make monthly payments.  Too much of this is essentially what caused the subprime bubble, which burst and left millions of people without their homes and massively in debt.  My student thought it was strange that Americans didn't just save until they could buy a house.  I tried to explain the unscrupulous element to my student and had to consult a Japanese dictionary.  It turns out the word for "scam" in Japanese is the same as the word used for picking up women.

The next topic was China, of which the Japanese are deathly afraid.  My student asked me if China was number one, to which I replied that China is fourth behind the E.U., U.S., and Japan, but high growth rates have convinced a lot of people that China will be the world's largest economy in the long run.  But the entire construct of nations is really irrelevant to economics in a globalized world.  In two or three generations, even if current growth rates continue, average income will still be far below U.S., European, and Japanese levels. 

I compared current Chinese growth rates and Japanese fear of a Chinese takeover to the Japanese bubble economy of the 1980s, when the learned men of the Occident predicted a Japanese takeover of the world economy.  But my student shrewdly replied that even now, the wealthy of China outnumber the wealthy of Japan, which has a population one tenth the size.  When Japanese tourists traveled to Southeast Asia ten years ago, they heard shouts of "Konnichiwa!" from aggressive Laotian vendors.  Now they hear "Nihao!"

We started comparing the populations of various regions.  China has about 1,300 million, India has about 1,200, the E.U. 500, America 300, and Japan 130.  But China is much more diverse than Japan.  The country is polyglot, like Europe, and full of minority regional groups: not just Han.  Japan, on the other hand, is like the U.K: linguistically homogenous, and population-wise Japan:China::U.K.:Europe.  The U.K.'s not all that bad, is it?  Just because the Czech Republic is wealthy doesn't make Britain poor.

We moved on to a discussion of the dreaded zero-sum worldview, which generally correlates with fear of China: basically, the idea that China's gain of twenty means a loss of ten for the U.S. and a loss of ten for Japan.  In actuality, China's gain of twenty probably means a gain of ten for the U.S. and a gain of ten for Japan.  In other words: with free trade, everybody gets better off, but China does it faster.  Any humanitarian should be okay with that. 

But this can only really occur if incompetent leaders don't try to prop up failing domestic businesses with bailouts and faux-tariffs that inadvertently trigger a trade war...