Monday, May 18, 2009

Economics for Dummies II

Saving is sin, and spending is virtue.

Japanese save a lot. They do not spend much. Also Japan exports far more than it imports. Has an annual trade surplus of over 100 billions. Yet Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US imports more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and is due to get stronger.

But where from do Americans get money to spend? They borrow from Japan, China and even India. Virtually others save for the US to spend. Global savings are mostly invested in US, in dollars.

India itself keeps its foreign currency assets of over $50 billions in US securities. China has sunk over $160 billion in US securities.. Japan's stakes in US securities is in trillions.

Result:
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The US has taken over $5 trillion from the world. So, as the world saves for the US, Americans spend freely. Today, to keep the US consumption going, that is for the US economy to work, other countries have to remit $180 billion every quarter, which is $2 billion a day, to the US!

Who has invested more, US in China, or China in US? The US has invested in China less than half of what China has invested in US.

India have invested in US over $50 billion. But the US has invested less than $20 billion in India. Why is the world after US?

The secret lies in the American spending, that they hardly save. In fact they use their credit cards to spend their future income. That the US spends is what makes it attractive to export to the US. So US imports more than what it exports year after year.

The world is dependent on US consumption for its growth. By its deepening culture of consumption, the US has habituated the world to feed on US consumption. But as the US needs money to finance its consumption, the world provides the money.

It's like a shopkeeper providing the money to a customer so that the customer keeps buying from the shop. If the customer will not buy, the shop won't have business, unless the shopkeeper funds him. The US is the lucky customer. And the world is like the helpless shopkeeper financier.

Who is America's biggest shopkeeper financier? Japan of course. Yet it's Japan which is regarded as weak. Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers. Even then the Japanese did not spend. Their traditional postal savings alone is over $1.2 trillions, about three times the Indian GDP. Thus, savings, far from being the strength of Japan, has become its pain.

Hence, what is the lesson?

That is, a nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend. "Saving is sin, and spending is virtue."

*another forwarded mail!

1 comment:

Razali Razman said...

A great paradox...

At the personal level, saving is a virtue while spending is sin.
But collectively at the national level, if everybody saves to much, not much gets produced, economy does not grow.

But I think we don't have to worry to much in Malaysia...there a lot of people out there more than willing to do a lot of spending...so that we can do some saving & investing