“Do everything in moderation” — Benjamin Franklin
Is All Still Well In Our World Today?
Do we live in a world of illusion? If we do, what would be one of the longest running one that deceives us into believing that all is still well in our world?
Consider, if you will, the cyclical nature of economies around the world in an environment of global-isation. The 2007 Financial Crisis, a severe economic downturn that is still with us today appears to promise, from its continued negative growth position, another long wait before the pain is eased for many. Even while hope springs eternal, no glimmer of recovery can yet be gleaned rising over the horizon with any certainty. And, if we benchmark the current economic miasma against three previous periods of economic decline – starting with the Crash of 1929, followed by the 1973-1974 Oil Crisis and the Tech Crash of 2000-2002 (see chart), it appears that it’s still going to be a bumpy ride on the way up.
What continues to cause these recurring relapses? Is it a case of pandemic financial mismanagement or some other human proclivity for mischief? Why is it that economic models measure the wealth and health of economies and their currencies not on their ability to save but rather, on their ability to spend? Is spending beyond one’s means a true measure of sound financial health and security? Obviously not.
Eyes Wide Shut Open
Is this just an illusion where the whole world has its eyes wide shut open? Let’s examine the definition of the word and then the current state of affairs to shed some light on this matter.
The word ‘Illusion’ can be defined in any of the following ways:
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an erroneous mental representation
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delusion: the act of deluding; deception by creating illusory ideas
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magic trick: an illusory feat; considered magical by naive observers
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something many people believe that is false; “they have the illusion that I am very wealthy”
Before I go on further with this, let’s first examine how countries measure their macro-economic affairs using one yardstick – their Current Account. The figures you’ll find on the list below identify each of 163 countries by name followed by its current account balance expressed in US$-millions, that is, 1 = 1-million. The list are chronologically arranged by the amount of their respective Current Account balances (positive in black, negative in red), starting with the highest positive number at the top and down to the highest negative figure at the end .
From the context of balance of payments, the Current Account of a country keeps track of its exports and imports. In very simplistic terms, we can alternately view this roughly as a measure of what it buys and sells, what it produces and consumes and what it saves and spends.
When exports exceed imports, economists say that there is a current account or trade surplus. When imports exceed exports, economists say that there is a current account or trade deficit. In other words, a positive figure means a country has managed to save from the sum of all its productive economic activities whereas a negative balance means the reverse and consequently causes it to borrow to keep its economy chugging along.
The countries listed below in black ink are, in a manner of speaking, those with ‘cash in their pockets’ – some with oodles of it, others with just a few wads. On the other hand, those characterised in red ink have holes in bowls. The bigger the number, the bigger the holes.
The Paradoxical Economy
At the beginning of the list, you’ll notice that the top performers are China, Japan, Germany, Russia and Saudi Arabia. The topnotchers’ position change from year to year and is therefore dynamic but traditionally, Japan has been consistently included in the Top 5 because it is a country that consistently save a lot. They also do not spend much and boast trade surpluses of over 100 billion annually. Yet surprisingly, the Japanese economy is considered weak, even collapsing.
At the bottom of the same list is the United States, a country well-known for saving little, spending much and borrowing heavily. It is a country who imports more than it exports and has an annual trade deficit of over $400 billion. Paradoxically, the American economy is considered strong and trusted to get even stronger.
America is a nation that cannot grow unless its people spend, not save. Worse still, not just spend, but borrow and spend.
It’s like a store owner providing financing credit to a customer so that the customer keeps buying from the store. If the customer will not buy, the store won’t have business, unless the stote owner continues to fund this customer. The US is the lucky customer. And the world is like the helpless store owner financier.
So why the illusion that the American economy is considered the most powerful one in the world? What is the delusion that drives this illusion?
How And Why The Illusion Works
The simple answer is – the rest of us. And the illusion that America is extremely wealthy lies in its spending, not saving. That the US spends is what makes it attractive to export to the US for most countries. The US has taken over $5 trillion from the rest of the world. The world saves just so that the US can spend freely.
Today, to keep US consumption going, that is – for the US economy to work, other countries have to remit over $180 billion every quarter, which is $2 billion a day, to the US!
The world is addicted to US consumption habits for its own growth. And because this growth is expressed more in GNP terms rather than its Current Account performance, the illusion continues. By its deepening culture of consumption, the US has habituated the world to feed on US consumption like a heroin addict. When the US needs money to finance its consumption, the world provides the money. Virtually others save for the US to spend.
Now here’s the best part of it all. Global savings are mostly invested in the US – in US dollars. America borrows heavily each day from such countries as, you guessed it, China, Japan, Germany, Russia, Saudi Arabia and even India. China has so far sunk over $160 billion in US debt-related securities. It has also invested in the US an amount more than double of what the US has invested in China.
Japan’s stakes in the same securities China invests in is even much larger, in trillions! That’s because Japan has been America’s financier longer than China has. But let’s not blame the Japanese. The rest of the world is much the same as the helpless store owner financier too. And since the US has hardly any incentive to save as it continues to borrow to import more than what it exports year after year it just keeps on adding more digits to its own ballooning Current Account deficit.
Do you think that is a bottomless pit? The rock has to hit ground at some point in time, doesn’t it?
Et Tu Brutus?
So, is America the only country that uses credit to spend their future income with abandon? Take another look at the list above. It is not alone. There are little America’s sprouting all over the world. Whatever sins America commits being a profligate spender and a poor saver is one that is also committed by a host of other countries to one degree or another. Just look at the deficits of OECD countries like New Zealand, Italy, France, Australia, the United Kingdom, Spain and so on.
The only difference is this: whether a country is a big spender or not, they are all linked at the hip chasing after the almighty American Dollar – which ironically and ultimately finds its way back to America one way or another.
And because more than half of all the nations of the world mimic the behavior of the US by not managing to save, they continue to be deceived with the illusion that a nation cannot grow unless its people spend, not save. And, oh? Not just spend, but borrow and spend! But the other half who manage to save are also just as equally guilty because they use their surplus to feed the humongous all-consuming appetite of America for borrowed funds instead of investing their surplus to develop and strengthen their own economic back yards. And guess who prints all those dollars?
That’s the American Dream we’ve bought folks and we have all of ourselves to blame for the nightmare it has become today (and will be again tomorrow) unless we break with this addictive habit.
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