No politician has publicly stated that US solvency requires such draconian adjustments, because the American public is far from agreeing to the sacrifice needed.

That would leave a net national saving rate of just 2.5 of GDP.

Apart from accounting for the global divergence in savings rates, tight credit constraints in China might explain the country s high, and rising, savings rate especially as the large rise in national savings is attributable mostly to household savings.

But, with the current low rate of household saving, the cycle of rising deficits and debt will soon make national saving negative.

Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate.

When all of these reforms are realized, China s national saving rate may be reduced to 45 , from 51 currently.

The problem currently is that a trade deficit has emerged at a time when the national saving rate is as high as 51 .

Saving. A domestic saving rate in excess of 50 has served China well.

Japan s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive.

Higher household saving depresses consumption because it is the difference between households after tax income and what they spend.

The strength of the Indian economy is underpinned by a high saving rate and robust investment.

Meanwhile, China s savings rate remains stubbornly high.

The net saving rate fell to near zero.

The excess saving could also decline if housing construction picks up.

Instead, it reflected a fall in the personal saving rate.

However, aging will keep the saving rate from falling at the same pace.

China s national saving rate including household saving and business saving is now about 45 of its GDP, which is the highest rate in the world.

Since the saving of younger savers is now high and the dissaving of the older dissavers is low, the net saving rate is high.

An economy s current account is the difference between its investment rate and its savings rate.

The household saving rate has collapsed in recent years, falling to less than 2 .

Household saving is only one part of net national saving.

They are all part of an enormous multilateral trade deficit that stems from America s unprecedented shortfall of saving a depreciation adjusted net national saving rate (combining businesses, households, and the government sector) that has been negative since 2008.

Of course, China s savings rate will also decline, but Japan s experience since the 1980 s demonstrates how a sharp fall in investment can generate large and persistent current account surpluses, even when the savings rate is falling and the currency is appreciating.

The saving rate in each of those 25 years was between 7 and 11 .

And with that lower saving rate will come a smaller current account surplus.

Although the saving rate came down gradually in the 1980 s, it was still 10 in 1990.

In any country, the current account balance is the difference between national saving and national investment in plant and equipment, housing, and inventories.

Looking ahead, the saving rate may rise even further, and will, in any case, remain high for many years.

So bringing the savings rate down is necessary if domestic and external balances are to be achieved.

The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving.

So the US is now saving nothing and investing next to nothing. Were it not for its current account deficit (which records capital imports from abroad), the US would also be investing nothing.

The rapid rise in saving has reduced consumer spending, slowing the pace of GDP growth in 2009 and in early 2010.

If the saving rate continues to rise rapidly, it could push America s fragile economy into another downturn.

One sure way to reduce the savings rate in China would be to develop an American style mortgage market there.

The drop in the saving rate can be readily traced to a massive increase in the rate of household consumption.

The result in Japan would then be rising real interest rates as the low private saving rate runs head on into large fiscal deficits.

Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate.

But then the saving rate fell by a full percentage point, reaching 5.3 in December 2010.

When all of these reforms are realized, China s national saving rate may be reduced to 45 , from 51 currently. That will have a very significant effect in terms of reducing the current account surplus, which reflects net national savings.

But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.

By contrast, China had a fixed investment rate of 41.7 of GDP and a savings rate of 51.9 , reflected in a large surplus.

But when a country s growth rate continues to increase, its saving rate would increase faster than its investment rate, so it is more likely to run a current account surplus.

Another implication of this view is that the steep rise in savings in China is largely driven by a rise in the savings rate of middle aged Chinese (rather than a fall in the borrowing rate of the young).

During the period 1967 1970, the TFR was 5.6, which was cut almost in half in the period 1995 1997. Currently, the TFR is 2.6 (SDKI 2002).

But the fall in domestic saving is likely to cause the Chinese government to allow the renminbi to appreciate more rapidly.