The penny is yet to drop on false economy of Asia's dollar delusions
BACK WHEN I WAS about eight years old my father took me to the bank one day, opened a savings account in my name and told me in front of the teller that he would put $10 in it if I put my allowance that week into it too.
The teller smiled and nodded, I fished into my pocket for the cost of an ice cream that I would now have to deny myself at the shop next door and all the way back home I got the usual homilies about a penny saved is a penny earned and a wise man is a prudent man and just think of how you may be investing in your own education.
We have all gone through that experience when young and it sticks. It has particularly stuck with the people who run Asian finance ministries and central banks. Just look at the evidence of it in the chart and table. Total Asian foreign reserves are more than US$2 trillion, the equivalent of 27.9 per cent of combined gross domestic product. We in East Asia are by far the world's biggest savers.
But if a penny saved is a penny earned, how could it happen that the world's biggest earner is such a poor saver? Look at the line along the bottom of the chart. It shows you the foreign reserves of the United States, less than 4 per cent of what East Asia has and yet the US economy is 50 per cent larger than the economies of all of East Asia combined.
Yes, odd indeed and the oddity lies in the reasoning that has led East Asia to confuse foreign reserves with savings. I shall let you into a secret about how Japan and South Korea, in particular, have built up large reserves. First, they issue bits of debt paper in their local currencies in exchange for US dollars coming into their economies and then they ship the dollars abroad.
This is called monetary policy, which is all very grand, but would you subscribe to the notion that your savings have risen if you borrow a dollar from one bank and then deposit it with another bank? In fact, savings in an economy are not the same as foreign reserves. They are defined as the sum of investment in domestic fixed capital formation, increase in inventories and net foreign trade. In plainer words, and although this is simplistic, when you think of national savings think of what a country saves and invests in itself.
Foreign reserves are technically only the balancing item on the balance of payments. They can be used as a form of savings for a rainy day, at the most simple level, for instance, to buy food abroad when there has been a massive national crop failure.
But when they get above a certain level of prudent insurance, and in all of East Asia they have long done so, what they represent is investment that could have been made at home but was actually made abroad. What East Asia is doing at the moment with its money is help fund American military adventurism in Iraq.
And what this means at home is poorer living standards than people might have had or needed to have. Most notably, it means that people get short-changed on their homes. I would not want to live in a Korean flat and I can think of good reasons why Koreans should not want to either. For the wealth they have built up they could have done better for themselves by now, but the money has gone abroad. Much the same holds true in Japan.
I think my father would have been happiest if I had kept building up that savings deposit and never in my life taken money out of it. To his dismay, however, I took it all out to help pay for a motorcycle when I was 18 and, when he protested, I told him it was an investment in my education because the university was 20 miles away and I needed transport.
I think people around the Asian region would be a good deal better off and no less prudent if they thought a little less my father's way.
I HAVE A bad cold. That's my excuse and I'm sticking to it. The reason I need an excuse is that in yesterday's column I said China had a one-month trade surplus of US$1 trillion, equal to the annual gross domestic product of Singapore.
Ummm ... yes, a confusion of zeros. Let us make that a one-month trade surplus of US$10 billion in November and it is the equivalent of 12 per cent of Singapore's annual GDP. Ha-chooo!
AND ONE LAST THING. Someone is on the television making a policy speech as I write this in the Foreign Correspondents' Club. No one is paying any attention. When he made his first big speech back in 1998 he had an attentive audience of more than 50 people.
