''Why the world invests its entire savings in US?
And what happens if on the other hand America can't borrow the money from an obstinate world??
It is now said that '' saving is sin and spending is virtue.'' It is so correct, but only for the right kind of nation! I would always suggest that 'don't ever cut your expenditure rather increase the size of your cake.’ On general assumptions that 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! Otherwise the US economy would go for a six. So will the global economy. The result will be no different if US consumers begin consuming less. The questions being asked is ''Why the world invests its entire savings in US? And what happens if on the other hand America can't borrow the money from an obstinate world??
An Indian economist recently wrote that 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''.
America works on the dictum that makes new global consumers; the debt is too trivial and can be paid off. American debt, seen in the light of new global consumerism and export of American habits, it is miniscule. The analogy of that shopkeeper is so off the mark that one can only ridicule and rubbish it. Yes, our world may be a shopkeeper helping the customer, the US, to buy more, by lending her credit, but the customer in this case is buying goods which are primarily and intellectually made by him. They have a huge hold on global intellectual property rights. Everything they buy helps their own self and, on top, to keep the world’s affluence on track they need to consume. Henry Ford used to say that he would only succeed if his workers can purchase the cars he makes. In similar vein, American dominance is sealed by making new converts globally who get addicted to products of the US. That cannot happen if China and India stay poor; the prosperity of China and India helps no one more than the US, since their savings are ploughed back into the US, and the rising middle class in India and China are the captive audiences of America’s corporate global reach. The new middle class is more American than Americans themselves; they love Al-Pacino and Hollywood; they take popcorns and use Microsoft. Imagine this: instead of 260 million domestic consumers, American corporations are looking at 1,000,000,000 by the end of this decade. The average revenue per consumer is a mind-boggling 500 US $ per month; add this consumption on movies, communications and medicines, and you could easily see where is Dow and NASDAQ heading in the next decade.
It is 'supply side economy with benevolence' that is answer to the present new-found prosperity of the world; incentives and openness is the basis of the world’s new-found affluence with the US acting as a growth engine and attracting the free capital of the world. Economy without compassion shall not exist; faces of New Orleans are showing that to the US government as we write; the invisible hand of compassion has to be behind any successful supply side efforts.
Take CDMA telephones for example, who gets the royalty for Qualcomm chip inside, or Nokia phones, they may be a great selling brand but ''smart technology'' inside is dependent on a few US corporations and they get their cut through royalty. Dirty industry like toy-making and garment-making has been shifted to the third world and China because they have low wage structures and they can 'export price stability' to the US. The reason US can sustain 70$ a barrel today without any sizeable dent in the spending pattern of disposable income is because of falling prices of communications, falling prices of technology and falling prices of garments and shoes and, moreover, inflation adjusted oil is still far lower than appreciation of any other asset class over the last 30 years. Rather in commodities inflation adjusted we are in a low cycle.
From entertainment to drugs like Lipitor or food products or Proctor and Gamble or amongst the top 100 well known brands, 82 of them are US companies like the MSFTs, Cisco’s and Intel’s of the world; even with chilies, an Indian specialty, 'Tabasco' does it better, or Kellogg or Heinz or Donuts or Ice cream like Hagen-Daaz or Baskin and Robbins, who is eating and becoming used to all this? They are the billions of nouveau riche of the world? It is China and India that are getting used to the 'Duracell' way of life or 'way' of Baskin Robbins. I will avoid McDonalds or KFC’s contribution to this long list of US corporatism that dominates the world’s taste and palates.
A way of life is being transported from US and ‘nous sommes Americain’ is happening at Gods speed. If a nation can export its culture through a few trillion $ debt, so be it! It is a virtuous cycle for that nation. Even US economist fails to understand the simple dynamics of this whole complex phenomenon; the 'new economic imperial reach through knowledge and products is something that this world has never experienced before.
They can afford to get all the credit of the world since their markets have the depth to consume this capital. No other markets have this. Kuwaitis and Saudis are advancing nearly everything from the oil windfall back in to treasuries and US investments since they are the most dependable and triple-A rating.
I can imagine the anger of the world and Europe, for that matter, that this customer of ours, i.e., the US who is buying all these products on shop keepers’ credit, and has IOU notes which are more trustworthy than gold, and those notes can buy oil as well as gold. The currency of global trading is $, not because people love the US but because no other currency offers the ability and liquidity. If a nation finds consumers four times the size of its population, why should it care about debt? The “intellectual lock” is so huge!
The R&D of Harvard alone is mind-boggling; their endowment fund is around 16 billion $’s. Not many schools in the world can show this kind of huge expenditure on education and excellence. Many R&D-heavy stocks are worth looking at, it's really those R&D that are going to drive long-run corporate performance, Pfizer spent $7.6 billion on R&D for drugs and $2.7 billion on plants and equipment. The drug maker deducted the entire $7.6 billion R&D expense from earnings because the accountants do not consider R&D a long-term asset whose value can be quantified. No credit is given to the investment in the future in evaluating Pfizer's earnings!
Europe is rotting with 35 hours a week labor, whereas US is flourishing, not because I say it, because we take pride in sending our kids to US schools even in Karachi. US consumerism is addictive and is right there, it is in your own home, that is the real reason everyone in the world supports that consumerism with their hard earned dollars. I thought you will enjoy this also which I wrote in 2003.
Now, what happens to America when it can't borrow the money??
The Chinese first of all would go bust; their entire prosperity depends on US imports, in turn they deposit their earnings in TB's to support the US consumerism. The present deficit and import – export game is not a zero sum game but a positive cycle. The US remains the growth engine of the global economy with the aim that many don’t understand - that of creating new buyers by exporting the American way of life! The new riches bring new habits of films that are made in Hollywood; the need of keeping in universal contact that is fed by coalition of MFST-INTC-DELL and CSCO; the basic requirement to feel healthy and remain healthy that is fulfilled by pharmaceuticals that are predominantly American. Europeans do not make the best cocktail for Aids, or from Alzheimer’s to Parkinson’s to ordinary blood pressure; US companies own the intellectual property rights and innovation rights. Old historical nations of the east are inflicting on themselves US habits, life style and similar health problems and for that new consumers with massive appetites are being added. I see no threat of so-called unsustainable phenomenon of financing the deficit. The wave of new American habits loving consumers sadly for me appear nowhere on any economic pundit studies! They abuse Americanism every day in the Middle East over super big cups of Starbucks coffees, hating America is fun talk, living the style is the walk the talk.
The ‘mother of all exports’ and the strongest of all commodities is 'The American way of life;' new Chinese and emerging nouveau riche in the sub-continent are styled in unabashed US consumerism. US is creating a huge market outside the US; in a region of billion people who depend on US products, like Starbucks for their coffee and big Mac for their lunch, sushi are out and the US empire has done what no one else has ever done - create a billion new consumers without taking their retirement responsibilities.
The trade deficit is a big plus as far as new outposts keep creating new global frontiers where American way of life is the way to go. From Tinanmen Square to Red Fort in Delhi, the 400 million plus new middle class just in these two countries are going to become the next baby boomers. No one but the American exporters of services, medicines and food will benefit from this huge rise of middle classes in China. The fact is that the US deficit is a small price in terms of keeping the world economies growing, but the real goal that is not appreciated by any Krugman is that all these are adding to a new consumer class that underpins future US economy. A new Europe is emerging from consumerist habits of Americans from the ashes of poverty of China and India; this could not have been possible or could not have been created by any Europe. The US deficit is the most intelligent policy ever devised by any global empire; it arises out of natural selection because freedom and hoping for a better life is a way we all want to adopt.
A new ASEAN baby boom is the future I see. It is in the interest of China to finance this deficit, Theirs and the 586 billion dollars of Hong Kong reserves do not at the moment have a region that has an appetite for this kind of parking of capital.
The R&D of US companies and consumerism of the US public decontaminates the global economic system and provides their capital an oasis of suitability and a market where it can optimally utilized. Defense may be wasteful expense but keeping peace in the world by the global policeman helps the merging regional powers like India and China the most. Imagine a squabbling war torn world, the new prosperity of India and China has lot to do with peace dividend. A burning Iraq may be a US humane and budgetary problem but a Saddam free Middle East is windfall for the economies of the region, from Iran to Gulf littoral states all are benefiting from this new peace within regional states. To keep an open world for trade may be mostly shouldered by US but the beneficiaries are from Russians to Europeans not to forget the BRIC’s nations. Someone lese is picking the tab for world washed with liquidity and prosperity post 911. Yes those very same nations benefiting from this new global economic activity are more than happy to send the $’s back to nation who is at the center of all this. It is positive virtuous game for everyone, why should any player destroy the precarious balance.
America in return by default is building ‘millions’ of new Americans everyday who like their way of life but perhaps may disagree with their politics. It is all about creating ‘markets and consumers’ prosperous enough to pay for the future intellectual rights of US corporatism. The stranglehold of the American corporatism on the global markets has a premium far bigger than present global debt. The few hundred billions of deficit is small change if compared to collateral benefits of creating a billion new customers in emerging markets. Imagine a world that is totally littered with poverty; a rich India and a rich China benefits no one else but the US. US instead of launching a ‘Marshall plan’ to create consumers is exporting prosperity through trade, exporting a dirty industry that is inefficient within the US borders, but makes perfect sense for people on the lowest rung of the ladder. The two are entwined, the interests are forged, and this is the link economist like Krugman cannot distinguish!
The free spree spending of America has brought the benefits of lower prices on the mall shelves, but for the Chinese from 1972, a few billion-dollar reserves to 356 billion today and massive increase in life style will only be possible if US stayed the course. It is naive to assume that Chinese or Asians will withdraw their funds from the US. The liquidity arising from such withdrawals has no place for parking; overheating is a challenge that Chinese are still facing, the same with India. The new reserves of 100-plus billons has created a new middle class that loves American values although US-bashing may be a common slogan after a dose of Lipitor, a big meal at Taco bell and double cream _Mocha cold from Starbucks. Every time the new rich middle class steps into the new world the tills at the US corporate in US start ringing; for every cent the new generation spends there is a cent of royalty for US corporations. This nonsense of unsuitability of US deficit is a cry of theoretical economists.
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