<$BlogRSDUrl$>

Tuesday, April 22, 2003

Low Savings=Optomism About the Future?-I've been on an international economics/finance kick in my classes as the semester comes to a close, for the standard textbooks in both microeconomics and investments always seem to wait until the tale end of the book to cover international stuff. If a business textbook has N chapters, chapter N-1 will likely be International X and Chapter N will be Current Trends in X or Professional Ethics in X. If we look at a flow of currency, the flow of dollars into US will be from buying goods, services and investments or just giving money to someone in the US (unilateral transfers in international econ-speak) while the flow of dollars out will be people buying goods, services and investments or from unilateral transfers overseas (the orange-picker from Mexico sending money back home or the cash sent to help build a Honduran church your congregation’s sponsoring). Those two flows will be equal, barring changes in the amount of dollars being held overseas. Setting unilateral transfers aside for the moment, a trade deficit (where the US imports more goods and services than it sells overseas) will be offset by an investment surplus. Why does the US run a chronic trade deficit? One big reason is the low political risk and high growth prospects in the US. The rest of the world likes us so much, they’re buying the country. We’re a better place to invest than most other countries, for there’s little fear of having their investment seized by leftists or having our economic system collapse. Also, a thriving economy will lead to greater opportunities for the average investor. Our inflation-hawk Fed makes sure that the US dollar retains its value. The other big reason that a lot of party-poopers on both the left and right point to is that low US savings rate compaired to that of the rest of the world.Part of that is likely due to our consumer culture and the easy availability of consumer credit, but another part is our upward mobility and confidence in getting larger salaries in the future to pay those loans back with and still have time for retirement savings. People in more stagnant economies have less reason to expect a brighter future and will play things closer-to-the-vest, borrowing less and saving more. I got myself in a little trouble talking about Lebron James' Hummer in my Investments class, for it got us off on a five-minute tangent on basketball rather than the intended example of Mama James borrowing against her son's soon-to-be-millionaire status. People in the US are more likely to go into debt when they feel secure that their incomes will go up in the future. When your thoughts on economics are how the pie is divided up rather than how big we can get the pie to grow, you'll tend to have a more pessimistic view of the future and more saving to meet that more-dystopic future.

Comments: Post a Comment

This page is powered by Blogger. Isn't yours?