Sunday, November 19, 2006

Savings is Sin , Spending is Virtue

A friend of mine, from walchand yahoo group site posted this interesting article written by an Indian Economist.

I found it very amusing yet apt and releavant in many situations.

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 is more than it exports. It has an annual trade deficit of over$400 billion. Yet, the American economy is considered strong and trusted 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 : 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! Otherwise the US economy would go for a six. So will the global economy.The result will be no different if US consumers beginconsuming less.
A Chinese economist asked a neat question. 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. The same is the case with India. India has invested inUS over $50 billion. But the US has invested less than$20 billion in India.
Why the world is 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 whatmakes it attractive to export to the US. So US imports more than what it exports year after year.
The result : The world is dependent on US consumption for itsgrowth. By its deepening culture of consumption, theUS 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 like the lucky customer. And the world is like thehelpless 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 it self, reduced the savings rates, even charged the savers. Even then the Japanese did not spend (habits don't change, even with taxes, do they?). 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.
Dr.Jagdish Bhagwati, the famous Indian-born economist inthe US, told Manmohan Singh that Indians wastefully save. Ask them to spend, on imported cars and, seriously, even on cosmetics! This will put India on a growth curve. "Saving is sin, and spending is virtue."
But before you follow this neo economics, get some fools to save so that you can borrow from them and spend!!!
p. s : I see many young Indians follow US example. They spend through credit cards, when limit of one credit card gets over, they switch to another. As they get defaulted, credit company cancels the card and files a suit in the court. They hope to get the due setlled or wait years for settlement. Most white good sellers offer defereed payement for all expensive gadgets, Banks offer instant loan without any scrutiny. Are we following US way ? If so, with 1 Billion population, our spending curve would be more steeper than US. But would the world pour money in Reserve Bank securities ? Else, we would be another latin american company who spend, enjoy by borrowing money from world bank. When time comes to repay, they default!! Then they devaluate their currency to make exports attractive and borrow more money to fund . Cycle goes on. Spending continues, merry making never stops.


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