|
George Bush and Ben
Bernanke set out to put out the fire by throwing gasoline on it
 Between them, President
George W. Bush and Federal Reserve Chairman Ben Bernanke last week
summed up much that is worst about America’s baby boom
generation. Those who dodged the draft for Vietnam are now trying to
dodge the consequences of a generation’s belief that the world
owes them a living. If the US carries on with this course it can only
result in a collapse of a value of the dollar greater than that of
the late 1960s and early 1970s when the bills came due for the Great
Society and Vietnam War.
Asia needs to beware.
It has been welcoming the short-term relief provided by the latest
bout of money-printing in Washington. More money from the Fed adds to
the global supply and hence keeps asset markets at inflated levels in
Asia as everywhere. But ultimately, as the owner of the bulk of
America’s vast foreign debt, Asia will be the loser. Hard
earned – often enforced -- savings will devalue, exposing the
folly of providing the Americans with candy at give-away prices while
spending too little at home.
At the first sign of
nervousness on Wall Street -- relatively small falls in asset prices
which might threaten oversized bonuses -- Bernanke was quick to offer
cheap money from the Federal Reserve for banks that lacked the credit
standing to borrow in the marketplace. All this is done in the name
of financial sector stability, code words for bailing out greedy and
incompetent financial market players.
Next up was President
Bush, kindly offering government-supported relief for vast numbers of
sub-prime borrowers who are unable, or soon will be, to pay rising
interest rates on their loans. This was presented not only as a way
of helping distressed, lower-income home-owners but of preventing
mortgage problems from having a knock-on effect on the wider economy.
Of course, it is also another way of bailing out those who persuaded
borrowers to take out unaffordable loans in the first place –
Wall Street.
Of course these bailout
efforts were accompanied by suitably responsible-sounding messages
about the need to avoid moral hazard, to let a few of the more dodgy
players suffer the consequences of their greed and stupidity. But the
mainstream message is bailout, bailout, bailout.
As if Bernanke was not
being sufficiently accommodating, other Federal Reserve governors
were on hand to push him. Frederic Mishkin chimed in with a demand
that prompt Fed action was essential to stop house prices from
falling. Bill Gross of Pimco, the world’s largest bond fund,
said much the same thing even though one would have thought bond
market vigilantes would be up in arms over such obvious measures to
induce inflation.
The financial media
have been full of exhortations from so-called experts urging similar
action. “He would, wouldn’t he” – to use the
phrase of the call-girl about a prominent client denying a
relationship.
What is astonishing,
particularly in Asia, is that this surge in the supply of cheap money
is deemed necessary after a decline of less than 10 percent in major
US stock indices and only a few percent in house prices. Even after
prices had risen by 50 percent in five years, 100 percent in a decade
and 300 percent since 1980, it is deemed unacceptable to Americans to
see a fall of even 10 percent. This would drive the economy into
recession, it is claimed.
Indeed it might. But
why not? The US economy has avoided a much-needed recession through a
level of self-indulgence and hubris that makes 1990s east Asia look
positively puritanical. Cheap money drove up house prices and enabled
existing homeowners to borrow against the value of their properties,
thus sustaining consumer demand. But the suckers who paid for this
indulgence were the foreign lenders underwriting the US current
account deficit, now running at a stunning US$700 billion a year.
Every effort to sustain
house prices through cheap money may in turn sustain consumer demand
for a while – but it will also sustain or even add to the
current account deficit. The last serious Fed governor, Paul Volcker,
has warned often enough that current account deficit of 6 percent
cannot be sustained for long, even by a country that thinks the
international system allows it free rein to print money and assumes
that Asia must save “excessively” to enable an aging
America to save very little.
Meanwhile America’s
own (few) savers are penalized by low interest rates which barely
exceed a consumer price index, even one manipulated by hedonic
pricing and chain links to deflate the index and hence pensions.
The Wall Street wizards
convinced Volcker’s pliable successor, Alan Greenspan, and
other central bankers that they had discovered new ways of using
money more efficiently, pushing up asset prices without endangering
any other aspect of the economy. Unfortunately central bankers almost
everywhere are far too close to the people they are supposed to
regulate. They have obviously forgotten the remarks of that most
worldly-wide of economists, J.K. Galbraith: “Financial
operations do not lend themselves to innovation… The world of
finance hails the invention of the wheel over and over again, often
in a slightly more unstable version”.
If the US was not a
spoiled brat it would realize that the only way to get out of this
bind and preserve the value of the dollar is to accept the
inevitability of a consumer-led recession. Households would consume
less and start saving. Consumption would fall, the economy would go
into recession, interest rates and the dollar would fall gradually
and balance would eventually return to the US current account.
But the baby boomers
seem to imagine that recessions and business cycles have been
abolished, that they do not need to save for retirement, close as it
is now, and that they deserve that second home and third car.
Of course the
entitlement society, the reliance on the narcotic of debt, is not
unique to America. But the US through the role of the dollar is for
now uniquely positioned to indulge it on a grand scale. This is the
global equivalent of the bumiputra policy in Malaysia providing an
apparently endless, god-given subsidy to a favored elite.
Just as non-Malays
reluctantly accept this for fear of something worse, so Asia is
accepting of the US debt for fear of something which would bring them
some short term pain too. But what they fail to appreciate is that
the longer this goes on the greater the likelihood of never being
repaid. In his last newsletter in February this year the late
Austrian-school economist Kurt Richebacher noted “much of the
credit now being borrowed can never be repaid because debt service
relies on capitalizing unpaid interest”.
That is a comment which
could apply to the whole of the US, not just some homeowners and
mortgage lenders.
The last few weeks have
seen foreign lenders from China to Germany lose huge amounts from the
sub-prime mess and the financial vehicles that turned sub-prime into
AAA ratings. Now Bernanke & co are suggesting that their easy
money will stop the rot so the foreign owners of US paper will not
suffer so much. But this is like pushing a drowning man into
shallower water farther from the shore.
It is a strategy which
might both be acceptable to creditors and work for the longer term if
the US did not need to continue to borrow vast amounts to sustain
consumption. But it does. So will east Asia and the oil exporters
continue to buy non-government US debt in massive amounts regardless
of both the credit and currency risk? Are they prepared to sacrifice
the future value of their savings for an easy life now, just as the
US has been failing to save to sustain consumption today?
Asia went through a
great trauma a decade ago when lenders pulled the rug from under
them. But the cathartic effect was such that they recovered
remarkably quickly. In a way, the western bankers who pulled that rug
so abruptly did the region a favour by bringing back a sense of
realism to the region. Asia could do itself as lender and the US as
borrower a similar favour by stopping buying US debt until such time
as that debt stopped growing.
 |
Subscribe to this comment's feed
Show/Hide comments
Show/Hide comment form
Coal surge is unabated, raising environmental concerns
If you’re looking for loans for any purpose come and talk to Richards Finance about your requirements. Whether you’re considering secured or unsecured loans, Richards Finance will help you find the best loans with the lowest interest rate and the most preferential terms available to suit your individual circumstances.
You may need to arrange a loan for a new car, a well-deserved holiday, home improvements, to pay school or university fees, or to pay off credit cards or an overdraft.
Your loans can be for any purpose and your application will be processed quickly to ensure your loans are granted as soon as possible. Once your loans are granted you are free to spend the money on anything you wish.
Your loans may be for any amount between 1,000 and 1,000,000 or any other currency like Dollars, etc and the repayment period can be for anything from 1 to 25 years.
Why Choose Richards Finance?
Borrow 1,000 to 1,000,000 Borrow over 1 to 25 years
Simple, fast and straight forward Free yourself from unwanted debts
IF YOU WANT YOUR FINANCIAL PROBLEMS TO BE OVER THEN CONTACT Richards Finance Via this email This e-mail address is being protected from spam bots, you need JavaScript enabled to view it