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  Straits Times Forum 3 Nov 07
Policy to 'borrow and spend and not save' is route to collapse of economy
Letter from Fok Kar Kee

Straits Times Forum 3 Nov 07
Spending cannot be a virtue in perpetuity
Letter from Ng E-Jay

Straits Times Forum 1 Nov 07
When saving is a sin, and spending is a virtue
Letter from A. Dharma Perumal

JAPANESE save a lot. They do not spend much. Also Japan exports far more than it imports. It has an annual trade surplus of over US$100 billion. Yet the Japanese economy is considered weak, even collapsing.

Americans spend a lot - and save little. Also, the US imports more than it exports. It has an annual trade deficit of over US$400 billion. Yet, the American economy is considered strong and trusted to get stronger.

But from where do Americans get money to spend? They borrow from Japan, China and even India. Virtually all others save - for the US to spend. Global savings are mostly invested in the US, in dollars.

India itself keeps its foreign currency assets of over US$50 billion in US securities. China has sunk over US$160 billion in US securities. Japan's stake in US securities is in the trillions!

The result: The US has taken over US$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 US$180 billion every quarter, which is US$2 billion a day, to the US!

A Chinese economist asked a neat question. Who has invested more, US in China, or China in the US? The US has invested in China less than half of what China has invested in the US.

The same is the case with India. India has invested over US$50 billion in the US. But the US has invested less than US$20 billion in India.

Noted and richest Indian industrialist, the late Mr Dhirubhai Ambani, once said that the government of India is naive (read fools) to park all the foreign currency reserves in the US at very meagre interest, really pittance, and then borrow from them paying higher interest!

Why is the world after the US?

The secret lies in the American spending - that they hardly save. In fact, they use credit cards to spend future income. That the US spends is what makes it attractive to export to the US. So the 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 again and again. The US is like that 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 US$1.2 trillion, 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 in the US, told Prime Minister 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 MNCs coming down to India, seeing the consumer spending.

But before you follow this neo economics, get some fools to save so that you can borrow from them and spend!

Straits Times Forum 3 Nov 07
Spending cannot be a virtue in perpetuity
Letter from Ng E-Jay

I REFER to the letter, 'When saving is a sin, and spending is a virtue' (ST, Nov 1), by Mr A. Dharma Perumal.

In the past decade, Asian economies like Japan have run huge trade surpluses with the US and accumulated a large amount of foreign reserves denominated in US dollars. Mr Perumal is of the opinion that as long as this continues, the US will continue to grow while savers like Japan will remain weak. This cannot be further from the truth.

If the US perpetually runs 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.

Straits Times Forum 3 Nov 07
Policy to 'borrow and spend and not save' is route to collapse of economy
Letter from Fok Kar Kee

I REFER to the letter by Mr A. Dharma Perumal, 'When saving is a sin, and spending is a virtue' (ST, Nov 1).

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).

Even with a well-developed financial infrastructure there must be willing lenders and borrowers on both sides. In Singapore, our own local banks have been moving steadily and cautiously away from investing in the property sector (both local and overseas) which used to be their mainstay business, to other business sectors as well. This is a healthy development for our economy.

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.

There is no need to 'pass the buck' down the line.
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