SAVING is SIN while SPENDING is VIRTUE

Posted on June 9, 2010

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The current account balance of a country is one of two major measures of the nature of a country’s foreign trade (the other being the net capital outflow ). A current account surplus increases a country’s net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
In economics terms,  the current account, is one of the two primary components of the balance of payments the other being the capital account. It is the sum of the balance of trade  (exports minus imports of goods and services), net factor income  (such as interest and dividends) and net transfer payments (such as foreign aid).
current account = balance of trade + net factor income from abroad + net unilateral transfers from abroad
In the list of 181 countries, based on the International Monetary Fund data for 2007, obtained from the October 2008 World Economic Outlook database , Malaysia ranking is 15 ( + US$29 billion ). Our neighbours Singapore ( rank 10 with +US$39 billion ), Thailand ( rank 21 with +US$ 15 billion ) and the number 1 country is China with a surplus of US$ 283 billion. Guess which country ranks the lowest at a negative -US$ 417 billion ? – just look at the bottom of this article before continue reading.
The following article is attributed to  Professor  Dr. Jagdish Bhagwati ( Economics Professor at University Columbia ) . He talks about how a country’s economy is being built up by borrowings and the consequence is a negative balance in its current account.

Saving is sin, and spending is virtue… Interesting article written by an Indian Economist…

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 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! 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. 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 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, an 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 reason for MNC’s coming down to India, seeing the consumer spending.
‘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.
Comments :
If the US continue to maintain their  large trade deficits with the rest of the world, it will end up losing more and more of its own assets to other countries. In the words of Friedrich August von Hayek, an Austrian-British economist and the winner of the 1974 Nobel Prize in Economics, an economy in its entirety will continue to decline as long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock.
An economy that consumes more than it produces will eventually need to pursue inflationary monetary policies in order to reduce the future value of its current liabilities. This is precisely what has happened in the US. Inflationary policies in the form of low real interest rates have led to a falling US dollar, which has just hit an all-time low against the Euro. If this continues, Americans will find their purchasing power being eroded more and more.
The concept of using excessive spending to generate growth has worked in recent years only because Asian economies have been willing to finance trade deficits with the US. But this cannot go on indefinitely. There will come a time when Asian economies mature and domestic consumption takes over as the main generator of economic activity in Asia. When that happens, the US will find itself unable to sustain its own trade deficits and will face a currency crisis.
In order to avoid this nasty outcome, the US must pursue restrictive monetary policies and gradually increase real interest rates even if it causes pain in the short run. But knowing the nature of the US Federal Reserve to avoid bitter pills, I would not pin hopes on this happening anytime soon.
Japan is the second-largest economy in the world today. Its economy is just not growing as fast as those of its G8 counterparts. The country could not rely on domestic consumption to fuel its economic growth, and has to depend on external trade as its economic growth engine. These are some of the economic issues that Japan faces today.
The issue with China is that the country lacks the sound financial and legal institutions to circulate the capital generated back into the local economy. The local companies generating profits and capital have no avenues to reinvest within the country, which means they have to park the money outside the country. On the other hand, the companies seeking capital to finance their investments cannot get it domestically and have to seek foreign capital which come with higher risk premiums (read: higher interest rates).
The analogy of the shopkeeper providing credit to the customer so that the latter can buy from his shop is not quite correct. The Chinese, the Indians and the rest of the developing countries export their human capital (labour) as well as natural resources (for some) to the US and the rest of the world. That’s their primary value-add to the world economy.
What’s the lesson here? Surely it cannot be just ‘to borrow and spend, not save’. That’s not the route to growth and prosperity, but a route to inflation and eventual collapse of the economy. The fall of the Roman Empire is a good example, where inflation was one of the reasons that led to its demise. Let’s not be distracted about ‘saving’ or ‘spending’, the issue is about efficient allocation of economic resources to sustain growth.
The lesson is to be able to continuously create value to grow and keep our place in the global economy. And we can continue to do this through the efficient use of our human capital (through education and training), our systems and our infrastructure that have been developed over these years.

This is a list of countries and territories by current account balance (CAB), based on the International Monetary Fund data for 2007, obtained from the October 2008 World Economic Outlook database.
http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance

Rank↓ Country↓ CAB (billion US dollars)↓
1 People’s Republic of China 283.756
2 Germany 160.627
3 Japan 141.656
4 Saudi Arabia 95.762
5 Russia 76.163
6 Iran 70.797
7 Norway 59.983
8 Netherlands 52.522
9 Kuwait 48.039
10 Singapore 39.157
11 United Arab Emirates 39.113
12 Sweden 38.797
13 Republic of China (Taiwan) 32.979
14 Algeria 30.600
15 Malaysia 29.181
16 Switzerland 28.776
17 Hong Kong 28.038
18 Libya 23.786
19 Qatar 21.374
20 Venezuela 20.001
21 Thailand 15.765
22 Canada 12.726
23 Austria 12.012
24 Finland 11.268
25 Indonesia 11.010
26 Belgium 9.648
27 Azerbaijan 9.019
28 Chile 7.200
29 Angola 6.936
30 Philippines 6.351
31 Brunei 5.990
32 South Korea 5.954
33 Trinidad and Tobago 5.380
34 Israel 5.197
35 Luxembourg 4.893
36 Argentina 4.459
37 Uzbekistan 4.267
38 Turkmenistan 4.037
39 Denmark 3.512
40 Nigeria 3.466
41 Oman 3.222
42 Bahrain 2.906
43 Botswana 1.974
44 Egypt 1.862
45 Bolivia 1.741
46 Gabon 1.719
47 Brazil 1.712
48 Peru 1.515
49 Namibia 1.356
50 Timor-Leste 1.161
51 Ecuador 1.064
52 Myanmar 0.917
53 Bangladesh 0.780
54 Equatorial Guinea 0.541
55 Papua New Guinea 0.259
56 Paraguay 0.227
57 Bhutan 0.132
58 Chad 0.116
59 Mongolia 0.098
60 Afghanistan 0.081
61 Suriname 0.071
62 Lesotho 0.058
63 Nepal 0.050
64 Kyrgyzstan -0.006
65 Guinea-Bissau -0.008
66 Solomon Islands -0.010
67 Kiribati -0.021
68 Tonga -0.025
69 Samoa -0.029
70 Comoros -0.031
71 Swaziland -0.041
72 São Tomé and Príncipe -0.044
73 Eritrea -0.049
74 Vanuatu -0.049
75 Belize -0.054
76 Sierra Leone -0.063
77 Haiti -0.066
78 Malawi -0.074
79 Central African Republic -0.075
80 Dominica -0.079
81 Gambia -0.080
82 Guinea -0.083
83 Morocco -0.099
84 Cape Verde -0.132
85 Liberia -0.137
86 Côte d’Ivoire -0.146
87 Saint Vincent and the Grenadines -0.147
88 Saint Kitts and Nevis -0.150
89 Burundi -0.156
90 Togo -0.160
91 Zimbabwe -0.165
92 Rwanda -0.168
93 Uruguay -0.186
94 Democratic Republic of the Congo -0.191
95 Guyana -0.195
96 Grenada -0.197
97 Antigua and Barbuda -0.211
98 Djibouti -0.211
99 Macedonia -0.234
100 Barbados -0.245
101 Seychelles -0.263
102 Saint Lucia -0.280
103 Cambodia -0.313
104 Niger -0.321
105 Mauritania -0.321
106 Uganda -0.331
107 Benin -0.372
108 Cameroon -0.383
109 Malta -0.403
110 Tajikistan -0.414
111 Maldives -0.476
112 Mali -0.502
113 Fiji -0.515
114 Mauritius -0.553
115 Burkina Faso -0.560
116 Syria -0.561
117 Armenia -0.591
118 Laos -0.711
119 Moldova -0.747
120 Mozambique -0.768
121 Zambia -0.810
122 Kenya -0.825
123 Ethiopia -0.868
124 Tunisia -0.925
125 Albania -0.994
126 Nicaragua -1.047
127 Madagascar -1.070
128 El Salvador -1.119
129 Senegal -1.161
130 Honduras -1.228
131 Yemen -1.328
132 Sri Lanka -1.370
133 Montenegro -1.381
134 Bahamas -1.440
135 Republic of the Congo -1.479
136 Tanzania -1.496
137 Costa Rica -1.519
138 Panama -1.571
139 Ghana -1.652
140 Guatemala -1.685
141 Jamaica -1.850
142 Bosnia and Herzegovina -1.920
143 Georgia -2.045
144 Cyprus -2.063
145 Dominican Republic -2.231
146 Slovenia -2.250
147 Jordan -2.778
148 Iceland -2.952
149 Belarus -3.060
150 Czech Republic -3.085
151 Lebanon -3.129
152 Estonia -3.776
153 Slovakia -4.070
154 Croatia -4.410
155 Ukraine -5.272
156 Lithuania -5.692
157 Sudan -5.812
158 Mexico -5.813
159 Colombia -5.862
160 Latvia -6.231
161 Serbia -6.334
162 Ireland -6.705
163 Pakistan -6.878
164 Hungary -6.932
165 Vietnam -6.992
166 Kazakhstan -7.184
167 Bulgaria -8.464
168 New Zealand -10.557
169 India -15.494
170 Poland -15.905
171 South Africa -20.557
172 Portugal -21.987
173 Romania -23.234
174 France -30.588
175 Turkey -37.684
176 Greece -44.218
177 Italy -52.725
178 Australia -56.342
179 United Kingdom -105.224
180 Spain -145.141
181 United States -417.999
Posted in: Business, Economics