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The cover story that appeared in the second issue of July 2005 made interesting reading on savings and growth in a country’s economy. It appears that the traditional theory that high savings by the people and organizations in a country will lead to substantial investments and high growth is being challenged. The United States, well known for the poor savings habits of its people is showing no signs of an economic slow down. In spite of low savings, investments in business and industry have grown to nearly 16.5% of GDP and long term interest rates have dropped below 4%. This trend surprised economists until they began to think in terms of global savings rather than on national savings. The free flow of money across countries is very high, something that was not so till the last few years. So, the paradox is in fact due to this free flow and hence can only be understood by looking at savings, spending and investment globally rather than within an economy.
There have been other examples that seem to support this view. The scenario is that the expected growth in economies where the rate of savings is high has not shown a corresponding increase in growth rate also. Many factors like free trade, steep rise in oil prices have pumped in surplus cash into many economies. Japan, Russia, some countries in the Middle East and China are some of the examples provided in the article. China is riding on its returns from its booming exports while Russia and the Middle East have got their cash thorough oil. China also benefits from the fact that its currency is still pegged to the US dollar and not on to a basket of currencies. It has also managed to keep the value of yen low artificially. Many European countries are holding hold huge surpluses due to changing demographics. “Future population aging is expected to require increased current savings to finance more person-years spent living in partial or full retirement.” (Population aging and macroeconomics, 2005). But except for China, very little productive investment in being done in these countries. What is happening around the world is contrasting. Except for China, none of the above mentioned countries are investing productively. All of them including China have so many cash surplus that they are finding it difficult to invest. What they mostly do is invest in bonds, mainly in US Treasury Bills. The United States on the other hand (along with the United Kingdom to a small extent) is running up huge surpluses without showing the negative effects of such a scenario. This is confusing to economists who have begun to give contradictory opinions on what will happen. Some are of the opinion that this is un-chartered or untested territory. This combination of high savings and global trade (in money and goods) has no previous precedence. There are also opinions that this state is unstable. The low interest rates have led to a boom in the housing market across the world. This has resulted in the rise in price of property to such an extent that it has become unaffordable for many (especially first time buyers) to invest in property and housing. An unexpected event or even a change in interest rates may bring the whole market crashing down. On the other hand, China may find itself without buyers for products made from its many new factories that have come up due to business investment in that country. The case of South Korea has added more confusion because even after investing the growth rate in the country is not up to expectations.
The biggest causality could be the United States itself. The surplus amount of cash is partly due to the enormous liquid balance available with corporations in the country. But it is mainly thorough investment in bonds by other countries with surplus cash. This is one reason for the huge balance of payment and also why the dollar has managed to even grow in value. Several contrasting results are seen here. Investing in assets and not for business and infrastructure development has resulted in low or no growth for several economies. Investing in business development by South Korea has not brought about satisfactory returns. The boom seen in Chinese exports could come to a halt if the global economy takes a beating. Lack of savings in the US has not so far shown any indication that its economy is slowing down. The US too is having cash reserves coupled with a huge trade deficit. The article concludes in a general way by saying that judicious investment will bring in returns where as being conservative will not do so. Being rash or hasty may result in the economy moving either way.
Population aging and macroeconomics: Aide memoire from seminar held at harvard university’s program on the global demography of aging: Savings, investment and finance. (2005). Meeting Held at the Harvard Initiative for Global Health Cambridge, Massachusetts, 2. 2008. Web.