Who is to be blamed?

All developing countries should have huge forex reserves. A finance pursuant  considers this knowledge as pedestrian. You are supposed to know this. But surprisingly, this concept did not emerge till the 1990’s Asian currency crisis. Till then emerging (developing) countries spent and the developed ones saved.

Well, so why am I raising this point?

Because, as is emerging now, the developed countries (read USA) might not be the sole culprits for the financial quagmire we are in today. The aftermath of the Asian financial crisis was many countries devaluing their currencies to promote exports. This led to a surge in exports to the US which inturn was followed by a huge inflow of dollars into these developing economies. These were then invested in US Treasury securities bringing down the interest rates there.

So as is the law if nature, “Every action has an equal and opposite reaction.” For the Asian economies to run gargantuan trade surpluses, developed countries like the US had to run similar trade deficits. So from a savings rate of 6% the US household savings came down to zero. This ofcourse, was not maintainable leading to the US bubble burst.

If the global economies hope to come out of these dire times soon, they have to realize that though it is requisite for the US to start saving more but more important is the need for Asian economies to start spending.

(For further reading consult Swaminomics in TOI dated 8th Feb)