SAVING is SIN while SPENDING is VIRTUE

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