The big argument between borrowing and saving (II)

Continued from last week. 

As for countries, it depends on what ideologies and philosophies drive them. I wouldn’t deride Japan the way the professor did. That country is technologically ahead of the US and it is dangerous to judge one country with the standards and way of life of another. Japan and Germany among a few others have chosen a path. China is like that too. There is nothing wrong in moderating national debt and tying them strictly to projects. There is also nothing wrong for a nation to be debt free. There is a difference as well, in the type of debts racked up by the USA and that racked up by most other countries. I recall watching a movie titled ‘The International’ where a top global banker confessed that the essence of war is to create national debt, and the essence of national debt is to control countries. Other intellectual sources also reiterate this. Countries like ours, which go a-borrowing, will soon go a-sorrowing when our hardboiled creditors come calling and demanding for what is not inside the terms of agreement.  What the professor didn’t say is that there are other factors responsible for where the US is today; sitting  atop the pile, and that these same factors will continue to be deployed to maintain  the status quo. Some of that is based on military power and intelligence. Also, the global reserve currency is the US dollar, and that country can as well print currency to repay its creditors if need be. However, its military power is what hovers around the necks of dissenting troublemaker countries like the sword of Damocles. 

So I’d say from a research evidential empirical and holistic perspective the articles are simplistic and presumptive. There is still value in saving – for those it works for. And we should be careful of an unsustainable credit culture across the board. If we want to have a honest discussion about who is smarter between borrowers and savers we must first ensure that the game is not rigged. We must be sure that people can get access to credit on a level playing field before saying some are foolish and some are smart. We should be sure that credit is given based on professional parameters and not man-knows-man basis as well.   And finally, we should all note that the concept of credit is a recent phenomenon. The idea of borrowing through life to live big has not been tested across generations, especially in places like Nigeria. Not many generations have handed over the baton of debt to their children so that we can see how it pans out. On a few occasions we have seen situations where people lived big on debts, and died leaving their families in pandemonium. Even mortgage is a recent phenomenon in foreign countries that we try to emulate. I have studied the history of housing in the UK and USA to confirm this. In about 20 years new problems will emerge and people have to reorder their priorities and spending patterns. We must be careful not to fall into deep ditches in the developing world. 

I believe there should be caveats around that branch of economics that proffers that a people should just spend spend spend. I believe countries that have a strong productive base can indulge in the luxury of consumerism, but countries – like ours – which have nothing and are gross importers of everything, should not buy that ideology. I know this is the economics that we have been practicing since the return of democracy, but it can only get us into trouble. The idea of reckless borrowing – whether as individuals, households, companies or governments – is bad enough but ours is made worse by the fact that our credit process is corrupted and everything is rigged; those who merit credit never get it. And those who get it, hardly repay. The taxpayers bail them all out in the end. Multiple tragedy.

For clarity and connection, I reproduce one of the articles below:

Article written by an Indian Economist about world economy. Amazing logic indeed. This is a crazy world! How valid is it? I leave it to you!

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 imports 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.

But where do Americans get money to spend? They borrow from Japan, China and even India.

Virtually others save for the Americans to spend. Global savings are mostly invested in US, in dollars.

India itself keeps its foreign currency assets of over $50 billion 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 – It’s The Americans who 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 $2billion a day, to the US!

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. It have invested in US over $50billion. 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 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 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 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 (habits don’t change, even with taxes, do they?). Their traditional postal savings alone is over $1.2 trillion. 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 in the 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. This is one of the reasons for MNC’s coming down to India, seeing the consumer spending.

‘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 !!!