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Living off the savings of people poorer than us

  • December 24th, 2008

Daniel McCaffry referred me to this perspective in the Atlantic from the other end of the debt telescope – from the CEO of China Investment Corporation, which controls around US$200bn and is a major holder of the US$2 trillion of US debt to China.

While his urging of a US troop pull-back may not seem relevant to us, and many of us might endorse his urbane suggestion of more humility from the US, the polite messages are just as apposite to us.

We have spent more than we’ve earned all my working lifetime, between 5 and 8 cents in every dollar we’ve spent over the last few decades. That is around twice the typical balance of payments deficit rate of the US.

We’ve gone from being one of the best educated, most practical, can-do, stoic, modest, crime-safe western peoples in the space of two generations to the opposite end of the western spectrum, yet still we feel qualified to lecture to others who have overtaken us or are doing so. Perhaps we are also about to witness  a shift from being one of the most trusting and trusted western peoples.

Without the economic or military capacity to inspire respect we’re bullying Fiji, thinking that a confident air of moral superiority will do the trick. People who can’t pay their bills can’t pull that trick too often.

When the Chinese, Arabs, Taiwanese and Japanese etc who’ve lent to us work out that the other Anglo countries really do mean to print money rather than let their foolish and vastly overpaid financiers fail, they’ll decide not to take more IOUs from us. Even if we do not intend to trash our currency we’ll be bracketed with the US, UK, and Australia as debtors planning to devalue our IOUs. Indeed our creditors could start with us because we can’t do so much to worry them.

They’ll decide not to roll over the current IOUs. They may instead try to use them to buy our assets. Assets protect from inflation. Theoretically that should appeal as less cataclysmic for us than the debt collectors. And we’ve preached open borders, and globalisation for so long that at the very least they should be able to spend the money they’ve lent to us on assets we’ve said should be in the hands of the highest bidder.

But the people of the Anglo democracies will tell their leaders they’ll be sacked if they let those assets go to such foreigners. Because ownership matters. It confers control. The party stops when you’ve borrowed as much as you can, then sold assets to keep partying, and the new landlords come down to tell you to start working as hard as they do, or else.

What happens when the Chinese, Arabs etc are told they can’t redeem their IOUs except, effectively, for more IOUs likely to be worth less tomorrow.

They stop our credit. They’re justifiably angry. We go to balanced payments cold turkey. It hurts them as well as us, because we stop buying so much from them – but what’s their alternative.

And here living standards suddenly drop to  what we can pay for without borrowing or selling assets.

I suppose the adjustment will be by way of a currency collapse.  

Should the Reserve Bank therefore let the money supply rip, if we’re going to be treated as if it was anyway? They’ll be pilloried if instead they keep money tight and asset prices adjust down.

If they or the government do print money nominal asset values may hold up and savers will be the losers. Two decades of religious inflation fighting gone for nought as another generation learn not to save.

Are these speculations wild? Do economists include these among the plausible scenarios? Why is there so little scenario posing in MSM?

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