I have often tried to understand why America is such rich country. Its saving rate is very low. Japan has one of the highest saving rates in the world and yet its economy is stagnant from more than a decade. In fact India has a higher savings rate than America yet we know the state of our economy.
The American economy is an expenditure based economy. It is a fact that Americans are great spenders and that is one reason why saving rate is relatively low. In purchasing power terms the app. 350 million Americans have a total purchasing capacity far more than us 125 billion Indians. It therefore is not at all surprising that all countries want a share of the American market pie.
I remember, during a visit to USA a few years back, seeing ready made shirts selling in good shops for only two dollars a piece. Try working back what must have the Bangladeshis earned but for the fact that the order volumes must have been very high. Almost all countries undersell their products into the US markets to earn vital dollars as part of their foreignn exchange. The average American is thus able to buy best of the world goods at cheaper prices and thus is a huge consumer of goods and services from other countries.
Both the Japanese and the Chinese export much more than they import. Yet it is the Americans who spend far more than either of them.The citizens of both countries are also very good savers. Both countries have very high foreign exchange reserves, China accounting for more than $3,000 billions. Indians also are saving at around 30-35% rate. But our foreign exchange reserves are only around $300 billions. Our savings are recycled into the economy but as we see they are used inefficiently and a sizable sum is pocketed by corrupt politicians and officials.
The Japanese export a lot, save a lot but do not spend a lot. This has caused their economy to stagnate and a few years back their was a negative rate of interest on borrowed capital in Japan. If one borrowed, say,100 yen, he was required to return only 97 yen after a year. How wonderfu,l if it could happen in India also. This was done to kick start the economy from stagnation. Still the Japanese did not become high spenders. It is their culture. However the country continues to earn from exports and the recent devaluation of the yen vs the dollar has again made Japanese exports more viable.
The Chinese are also good savers and are now the second largest economy in the world. They have become a hub of cheap manufacturing and the whole world is market for their competitive goods. In the process they earn huge volumes of dollars. Both China and Japan are positive gainers in their International trade as they earn more through their exports than the outgo from their imports. In India's case opposite is the case. Our Import outgo is nearly 50 to 60% more than our export earnings, leading to continuous Current Account Deficit, since 1947 till date.
The predominant currency of international trade is the US dollar. Thus all trade surplus countries like China and Japan earn huge dollars every year. Where do they keep these dollars.It does not make sense to keep them in their own countries and earn no interest. These dollars go back into the American financial system especially government bonds etc.for safe keeping and earning whatever low interest rate that they will give. Thus America gets billions of dollars from most of he countries of the world in varying quantities in proportion to their international trade volumes. Even India keeps some of its dollar earnings in American finacial system.
This is the biggest single reason which makes America look so rich. Money is available in plenty to its citizens at very cheap rates.This is also the reason why the American government is able to run trillions of dollars of budgetary deficits every year with out any serious damage to its economy.
The Americans benefit both ways. Its fiscal system gets surplus dollars from all over the world for safe keeping and its citizens get the best of the products from world over at the lowest prices. This creates a high consumption society. It is what the world wants. The more the Americans spend the more benefits many economies of the world derive.
US is not bothered about its very high budgetary deficits because it is estimated that on an average $2 billions are received by it from other countries for safe keeping. Such is the level of trust in the American system that almost 40 countries keep their gold holdings with the American Federal Banks.No doubt they are able to afford the Afghan war since so many years.
However one has to give a tribute to the Americans that they have reached this level in the committee of nations where not only their citizens but the whole world is working very hard to keep America and Americans rich.