Classical Economists have always been advocating the doctrine of saving, not just to provide for personal future benefits but also for the benefit of the country’s economy. But as times change, so do people’s perspectives. And thus, the Economic theory has undergone a paradigm shift towards what is now known as neo economics...
The Indian economy is also gradually advancing towards the culture of Spend More-Save Less. With diverse insurance and loan schemes available, people’s future needs are provided for. The burgeoning middle-class having more and more disposable income has become the potential target for the manufacturers of consumer durables and non-durables. With a plethora of retail shops, supermarkets and hypermarkets replacing the old mom-n-pop shops, individual customer needs and conveniences are all taken care of. Everything from cakes to clothes is available under one roof. Even the non A and B SEC segments have started living out of their wallets. Everyone is plunging into living a higher standard of life. This has in turn resulted in foreign retailers eyeing the Indian markets for their share in the pie. With retail giants like Wal-Mart and Marks and Spencer venturing into the Indian lucrative markets, the consumers are now more into the buying blitz. The cycle thus continues… More retail FDIs, more known brands, broader sphere of selection, more insatiable demands and finally more credits.
Taking illustrations from the two major giants - Japan and the US, each adopting a saving culture and a spending culture respectively, we can study the impact of each of them on the economy.
Japan comprises old working population. Their modus operandi is thus simple, conventional, mainstream and orthodox. The Japanese are hard-working, less risk-taking and believe in saving rather than spending. Every move of theirs is planned with substantial calculations and analyses. This started ever since the country was devastated in 1945 by the US bombings in Hiroshima and Nagasaki. Their growth curve post World War II has been tremendous. Their well-planned avenging strategy on the US is much evident from their ‘dumping’ policy in the 1980s and 1990s. Their automobile sales targeted the US markets in such a way that they sold their automobiles at much lower prices than the automobiles manufactured in the US. As a result, GM and other American automobile manufacturers suffered distressing losses. They also disallowed US access to Japanese markets.
The Indian economy is also gradually advancing towards the culture of Spend More-Save Less. With diverse insurance and loan schemes available, people’s future needs are provided for. The burgeoning middle-class having more and more disposable income has become the potential target for the manufacturers of consumer durables and non-durables. With a plethora of retail shops, supermarkets and hypermarkets replacing the old mom-n-pop shops, individual customer needs and conveniences are all taken care of. Everything from cakes to clothes is available under one roof. Even the non A and B SEC segments have started living out of their wallets. Everyone is plunging into living a higher standard of life. This has in turn resulted in foreign retailers eyeing the Indian markets for their share in the pie. With retail giants like Wal-Mart and Marks and Spencer venturing into the Indian lucrative markets, the consumers are now more into the buying blitz. The cycle thus continues… More retail FDIs, more known brands, broader sphere of selection, more insatiable demands and finally more credits.
Taking illustrations from the two major giants - Japan and the US, each adopting a saving culture and a spending culture respectively, we can study the impact of each of them on the economy.
Japan comprises old working population. Their modus operandi is thus simple, conventional, mainstream and orthodox. The Japanese are hard-working, less risk-taking and believe in saving rather than spending. Every move of theirs is planned with substantial calculations and analyses. This started ever since the country was devastated in 1945 by the US bombings in Hiroshima and Nagasaki. Their growth curve post World War II has been tremendous. Their well-planned avenging strategy on the US is much evident from their ‘dumping’ policy in the 1980s and 1990s. Their automobile sales targeted the US markets in such a way that they sold their automobiles at much lower prices than the automobiles manufactured in the US. As a result, GM and other American automobile manufacturers suffered distressing losses. They also disallowed US access to Japanese markets.
Like many other Asian nations, Japanese exports have always surpassed the imports. They enjoy an annual trade surplus. Yet their economy is considered to be not very strong... To inculcate a spending culture, the Japanese government also reduced the deposit rates and even charged the savers (negative interest rates), but people’s outlook did not change. They preferred saving in deposits to even holding back the money with themselves. Neither the trade surplus nor the domestic savings have helped the economy.
Au contraire, the US government provides the citizens with Social Security schemes – future life securities, employment securities…even unemployment securities! Reassuring schemes as these left no reason for people to save. Thus, the US is one of the countable few nations flourishing on credit culture. Contrary to Japan and many other countries, the US has banked mainly on imports. They have an annual trade deficit. Their investments in other countries is also far less than others’ investments in the US. Yet, the economy is expanding and is believed to grow stronger... The US economy is thriving on the back of the savings of the rest of the world. Countries like Japan, China and India invest most of their forex earnings through exports, etc. in the US Treasuries which in turn help US consumers' spending.
Au contraire, the US government provides the citizens with Social Security schemes – future life securities, employment securities…even unemployment securities! Reassuring schemes as these left no reason for people to save. Thus, the US is one of the countable few nations flourishing on credit culture. Contrary to Japan and many other countries, the US has banked mainly on imports. They have an annual trade deficit. Their investments in other countries is also far less than others’ investments in the US. Yet, the economy is expanding and is believed to grow stronger... The US economy is thriving on the back of the savings of the rest of the world. Countries like Japan, China and India invest most of their forex earnings through exports, etc. in the US Treasuries which in turn help US consumers' spending.
What would you do if you were not to spend?
You would deposit your money in banks or in any other avenues for investments. Your money in turn would be used by these institutions to give credits and loans. In other words, you are saving so that others can spend! Give it a thought…This is precisely what capitalist countries like the US have banked on.
To get more into neo economics, here is what Dr. Jagdish Bhagwati, an Indian-born Economist in the US, a Professor of Economics at Columbia University has to say. ‘Don't wastefully save. Start spending, on imported cars and, seriously, even on cosmetics! This will put all nations on a growth curve. "Saving is sin, and spending is virtue." Before you follow this neo economics, get someone to save so that you can borrow from him and spend.’
So go ahead guys… spend...
……but not your money… :)
11 comments:
Nice blog...
Now i can justify spending :)
On a shopping spree now...
It was very interesting. Thanks for introducing this relatively unknown term (was atleast for me) - Neo Economics. I was somewhat surprised on your advocacy of spending over saving as it contributes to the nation's growth.
But for argument sake, since banks extend long-term credit to companies, won't their capacities increase if we deposit more (savings) in them? Wouldn't it mean more money for the corporates for expansion, diversification and thus employment? Won't this in turn not only contribute to employment but also increase in the country's GDP as more goods will be manufactured and services provided? So doesn't this also help the nation grow?
Hmmm..."Saving is sin, and spending is virtue."
"So go ahead guys… spend...……but not your money…"
Words of wisdom from Aarti...Wah Wah... Now we all know y u make others pay for u all the time ;-)
What a comeback post..”Neo Economics”. Very well written and an educational one! Thanks for sharing some info (for a change)!
Btw, was surprised to hear about the -ve interest rates in Japan! Trying to compel people to spend...
But as u mentioned, "You are saving so that others can spend!" ...In that case, why save???
People, start throwing lavish parties!!!
Nice topic to shed light on.
This concept seems quite novel - "Saving is sin, and spending is virtue." However, taking further Phani's point - If everyone were to desist from saving, then the banks' primary source of income would have vanished, and consequently the other effects as pointed out by Phani. I think this theory would work if practised by "some" and not "all". Nevertheless, now's your chance!!!
Aarti, You've been away from blogging for a long long time. From what we can see, you seem to have spent all that time getting better and better. :-)
Sorry this reply might end up being longer than your post. I have a lot to say on this topic. So please bear with me..
For decades, most developing have been furiously adding capacity for manufacturing goods and providing services. But since they lack large domestic markets, they peddle most of it to the US.
But US does not have money to buy all that stuff, so they pay for it in their own currency. Countries like India, China keep their earnings in dollar dominated securities. The dollar being just a piece of paper is printed freely by the US fed to finance its overconsumption.
Developing countries have to continue holding dollars to keep their currencies low and keep the cycle going. This sustains growth and therefore employment in their countries.
But guess what?
This zero-sum game seems be ending. More and more countries are realizing that their dollar holdings are worth less and less since the US fed has been printing too many of them too often. The US household savings rate is already in negative territory. The subprime crisis has already showed how dangerous it can be to allow loans to people who have no means to pay them back.
A loan driven consumption market is bound to go bust hollowing out the middle class. It's becoming clearer is that the world needs new markets which are sustainable in the long term.
Together, India and China have 2 billion people waiting to become the consumption black hole for the world. But an overwhelming majority of this population has little or no disposable income. So far the consumption boom has been largely thanks to a euphoric 10-20% upper and middle class spending like money was going out of fashion. If we can get the balance 80% to earn enough to have disposable money, it can create a consumption monster that will need no dangerous loans to sustain itself.
But the core question, how do you get so many people to earn enough to spend? Don't ask me. If I had an answer, I wouldn't be writing this mammoth comment in response to your post!!
Very insightful piece. It is imperative that we not fall in the trap of making things too simple. It is a simplistic thought that it is better to spend than to save, because when one saves, i.e. when one deposits monies in banks et al, one gives others the opportunity to spend.
We must remember that we save not for want of avenues of spending or because we are a stingy people. We save because the propensity to prepare for the future is inherent in our genes. If you analyze the social spending habits in countries in Europe, you would find similar trends. The United States remains splendidly isolated in its unique economic model wherein the impetus is on spending; nay I say people are made to feel that spending is part of their sacred patriotic duty. Maybe that's why basic banking knowledge is woefully lacking in the Americans.
We have always spent, before, as well as now, so long as we can afford it. Let us continue to maintain such caution.
P.S. Welcome back!
hey..welcome back.nice to see your post after a long lomg time..bahut kuch sikh rahi hai tu thanks to your PG...neo economics..this topic is really very intresting..spending strengthens the economy. yes.it is true but too much of anything is not good. The current crisis in the US is because the country is in complete debt. the economy is weakening.the $ value is coming down. at the same time , our economy is growing strong because people have started to spend more. i guess there should be a balance between the both for the economy to sustain
wow!aarti u have already jumped into the economics and management wagon,what fundas?as u say "Saving is sin, and spending is virtue" this statement of urs actually throttles my funda which is "Saving is virtue, and spending is sin",hahaha!anyways whatever neo-economics states digesting this is a little difficult for people like me!Had heard Macro-economics from Sunil and now neo-economics coming from u!So how many more economics are there?anyways a very informative post.
Hi arts...sorry for the late post...
I quite agree with what Phani says...
Was thinking about your Japan Vs US argument... If we need to put Japan into perspective, we should look at multiple factors as to why the savings rate might be high...
1) Skewed population growth - Less young people to fuel consumption
2) Similarly, reduced spending by old people
3) High cost of living (Tokyo is one of the costliest cities in the world) - Less disposable income
Although I quite agree with the facts about Us that you have enumerated, in my opinion, it is fallacious to compare the two in this particular way.
"you are saving so that others can spend! Give it a thought…This is precisely what capitalist countries like the US have banked on."
I am not sure I relate to this... I mean, this is precisely how any economy functions!!
Plus, capitalism has to be fueled by supply & demand...Dont see how US or any other country is a case in point...
Overall, I think its a good concept that you brought to light... Certainly dint know of it before... Would love to hear more on it...
Hey aarts, nice post...very informative...especially for a "gawaar" like me...:) From this statement you should know that I don't have any knowledge to share on this topic ;-)
But great to see that you are learning so much that too,so soon...Maybe you did have an interest in financial matters earlier too but are able to bring it out better now,thanks to the field you chose...
As roops says,it's against my funda too(spending, as opposed to saving)...
Btw,great comments from kris :)
Almost laughed out loud at office :)
- Maya
Neo-economics….tht is the first time I hv ever heard this term. Any ways, I think these retail stores or more specifically the malls hv only created deep holes in the pockets of burgeoning middle class people. They think by spending on branded items can get them to the level of those upper class people or rich/super-rich people who spend money more than they inhale oxygen. But “Don't wastefully save. Start spending, on imported cars and, seriously, even on cosmetics!” can be given a second thought. We can also invest on properties wherein others won’t get the opportunity to bank on our saving.
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