Wednesday, August 17, 2011

Seeing The Heap Of Rubble From More Angles

Mr. Koon Yew Yin has sent me this insightful, simple yet clear article by an Indian economist (I think, or a potential American bank CEO anyway). Much of what he has written is true but there are a few things we should add. My comments in bold and parentheses.

The 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 billion, yet  Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US import  more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.
 (Well, the US economy is not strong at all. While we have been fixated at the federal budget deficit, there are much larger holes to think of. One is total obligations over the coming 10-20 years, much of it in interest and paying for medicare and pensions. Two, that is at the federal level, almost every single state in the US is already way deep in deficit, i.e. tax revenues cannot cover normal budget requirements and committments / liabilities / claims from their residents.

What are strong: US corporations that have invested well overseas; US education system that still attracts the best and hence having cherry pickings of the top brains; US lead in research, development and innovation, you can't buy that culture of innovation; all that may have a lot to do with having critical mass in population and transparency in rewarding efforts and innovation; and the immense movement, raising and deployment of capital for investing - more than adequate capital searching for great ideas, and good businesses finding critical mass for their products and services with immediacy.)

 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.


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, the countries have to remit $180 billion every quarter that is $2 billion a day to the US! Otherwise the US economy would go sick.So will the global economy.

The result will be no different if US consumers begin consuming 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. We have invested in US over $50 billion. But the US has invested less than $20 billion in India.
(To be entirely fair, much of why the US have accumulated so much debt and trade deficit is because of the deliberate and purposeful under-valuation of emerging markets currencies. You make your own currency weak to boost your competitiveness and export marketability, and then you fucking turn around and scold the very people that bought your highly competitive goods? All the while, enjoying higher employment and growth for your own domestic economy. If the US had taken a much stringer line on currency valuation disparity, growth in China, India and other emerging markets may not have been as solid - then we fuckers would have been scolding the US for suppressing the emerging markets from joining the global economy!

But of course the US has to shoulder some of the blame as well. Is it the lack of savings or over consumption? Its neither really, the root of the problem is the existence of substantive safety nets - subsidised medical care; good pension schemes; the separation of parents-children support network when the latter reaches adulthood; etc. When a society has strong safety nets, there will be a direct causation to less savings. Emerging markets population naturally save more as we have to take care of ourselves all the way, plus your immediate family's lifelong welfare.)
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 what makes 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 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 his shop. 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 the helpless shopkeeper financier.

Who is America 's biggest shopkeeper financer? 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 (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?
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 in the US , told that don't wastefully save.
Start spending, on imported cars and, seriously, even on cosmetics! This will put all nations on a growth curve.
'Saving is sin, and spending is virtue.'

Before you follow this neo economics, get some fools to save so that you can borrow from them and spend.
This is what US has successfully done in last few decades.

Written by Dr Jagdish Bhagwati, an economist.
(While much has been written about the US flagrancy for financial discipline and excessive addiction to debt, we need to look at the issues from more angles. We have to remember that a substantial portion of their debt stems from funding their military strength. Is that for the US alone? As the policeman and guardian of the virtues of democracy and sanctity of human rights in down-trodden countries with cruel regimes, we have no one else to do that. Yes, the US may not be doing that for pure altruistic reasons, but what if the US just cuts back 90% of their military spending to manage their long term deficits better - can you imagine the pockets of anarchy and the trampling on human rights all over the world.

To think of it in another way, if the US were to farm out their military spending as a "cost subsidy to all emerging markets", do you think the emerging markets can afford to pay for that "protection". Don't even think of saying you don't need protection, we are all enjoying the protection already in some major way or form. Think of China extending their might towards the rest of Asia, or inflict greater incursions into Taiwan. Think of the havoc propagated by the Islamic fanatics left unchecked. Think of Indonesia deciding to capture Malaysia and Singapore, just because they can. ) 


lai said...

OMG, that is one hot MILF!

MBSB still got some leg???

Mohammed said...

If I owe a bank a thousand bucks, it is my problem. If I owe it a billion bucks, it is the bank's problem.

VQ said...

We have acronym likes SIFI "systematically important financial institutions" being coined in Basel III.... A by-product of the globalization of free economy since the 90s.

How ironic?

VQ said...

We have acronym SIFI "systematically important financial institutions" being coined in Basel III.... A by-product of the globalization of free economy since the 90s.

How ironic?

JL said...

For a start, I am certainly not an economist. Actually did quite badly for my economics paper. Yes, I agree that spending does help with the economy. The US is a great example. Placing the idea of mortgaging your own home to get extra cash for consumers to spend is a notion that I would not go anywhere near. And this was subjective to a property market that will continue to rise.

Being japanese too is a little too much. The savings 'glut' is definitely hurting them.

There needs to be some balance of saving and spending to keep the economy moving and also to safe guard our future. There is also a lot of factors hinging on this ie financial condition of parents, personal income, health and so forth.

Looks to be evident that our country's growth is in line with the rise in household debt, which could be allowed to grow but has to be curbed before it becomes excessive. Social disorder will follow if majority of the ppl are deep in debt.

The riots in England is worrisome. More worrisome is the US where ppl are literally arming themselves more to protect their property, evident by rising gun sales.

Here's to better health and wealth. Back to watching the market. Sorry if my comments does not seem to make sense. Been quite some time since I put much thought into writing.

Tan HW said...

Totally dont agree on the last part of china extending it might, from china centuries of history, how often did the country extend it continent through wars?

tchtax said...

I agree with this statement "The US is like the lucky customer. And the world is like the helpless shopkeeper financier."

Heck we have the American consumer to thank for what the world is today (with some exceptions of course) , especially us Malaysians. Without their spending we would just be growing at a snail's pace and probably our standard of living would be comparable to the 70's. Americans just keep consuming and wasting. Pros and cons to this.

Boutique Classical Attitude said...

US has to learn to spend within its means, what they are doing is enjoying at Japan and China's expense. Eventually, they still have to pay either in $ or other ways.

green said...

Spent? First Gov and World need to bring USD1 to RM2. Get rid of all M'sia tax unnecessary tax; car tax and such. Then we sure spending.
Help me to Help you. Pay and currency like crap here how to spent on other then bare necessities

edragon said...

Yeah, peace sets the basis of growth. For all the policing that the Americans is doing, they benefited immensely selling arms thereby making them the biggest arms promoter in the World. Arming the World to promote wars, then, they come in and be the middlemen. Whatever missiles or bombs used are old stocks or demo stock which they could no longer sell, nearing expiry dates.