Perhaps the most important point I would like to make follows from an article in the Telegraph in which the commentator was discussing a bleak picture for the world economy. He refers to the huge US borrowing needs that are emerging.
Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.For regular readers, they will remember that I proposed that China would have to start selling US assets to fund their own stimulus, and that in doing so they risked a collapse of the $US. I noted that the Chinese would have to strike a balance in the volume of sales of these assets, such that they pulled in as much value as possible before the whole market collapses, leaving them with piles of useless paper. It looks very much like they are following this course, and the question that therefore looms in my mind is to ask how long before all the other $US holders follow suit?
In the meantime, for those who are probably already spooked in the bond market, the sheer scale of the continuing growth in US government commitments must be rapidly eroding what little confidence there may be left in the $US. On the one hand, Obama's 'stimulus' package looks set to progress through government, and on the other hand there is the latest bailout announcements for the banking system in the US. With each month that passes, the numbers, the massive and horrendous scale of the commitments of the US government, are moving beyond belief.
For those who look at these numbers, they are still comparing these numbers with notional and shrinking measures of GDP. However, for overseas holders of the $US there will be an increasingly frightening question that will by now be crossing their minds. In order for the US to repay this borrowing, at some point they must sell more goods and services than they import, must have a positive current account balance. In order for these monstrous sums of money to be repaid, this means not only reversing a massive trade and current account deficit, but turning these massive deficits into massive surpluses. Quite simply, it is not going to be possible to achieve this if the US government continues the massive borrowing, and attempts to support their economy through ever more borrowing.
In all of the measures, there is not one single measure that addresses fundamental structural reform of the US economy. As such, the holders of $US assets are going to very worried indeed. For those of you who still doubt the potential for a complete $US collapse, I will refer you to a link here, in which it is revealed that there was an electronic run on the US banking system in September, revealed in a C-span broadcast:
At 2 minutes, 20 seconds into this C-Span video clip, Kanjorski reports on a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or twoI suggest that watching this will correct any misconceptions that the $US and world economy is not currently in a position of extreme fragility. The really odd thing about this is that the media have not grabbed hold of it yet.
Overall, the process of the unravelling of the $US appears to be going very much as I expected/predicted. The continuing desperate attempts of the US government to support ever larger parts of their economy is just adding fuel to the fire.
Meanwhile, as this is all going on, the world and the media are increasingly distracted with what can only be described as a media circus. The particular circus I am referring to is the question of executive pay, which has served as a handy distraction in which huge numbers of commentators and politicians can indulge in self-righteousness. The reality of the situation is that, whilst the bankers played a part in this crisis, they were not alone, but aided and abetted by government, regulators, and central banks.
However, with their cap in hand for ever more bailout money, one of the prices that the bankers have to pay is to take the full measure of blame on their own shoulders. They are not in a position to point their fingers at the others who have been complicit in the mess that has been created. The price is that blame is doled out to them, and they must bend over and take the beating on behalf of all of those who are responsible. Perhaps one of the more moronic variants in the media can be found in the Telegraph, regarding the enquiry into the crisis. I recommend reading this, if only to illustrate how puerile the whole business has become.
These enquiries also serve a more immediate distraction, which is to shift focus away from why so much money is being poured into an insolvent banking system. This is a matter of importance, not the pay rates of the bankers who are benefiting from the bailout. Whilst their remuneration should be a matter of public concern when they are being bailed out, it is insignificant when compared with the actual bailout overall (over some of my recent posts, I have been building towards a further discussion of the bailouts, but have not yet had the time to address this).
I can not help but think that all of this talk of evil bankers is simply a distraction which serves the politicians by diverting our attention from what really matters, which is that all of their plans and schemes are doing nothing to reverse the current economic crisis, and are already leading to the ultimate collapse of the $US in the case of the US, and £GB in the case of the UK. It only serves to direct all the blame onto a group who are unable to defend themselves, and who are therefore convenient scapegoats.
I will re-emphasise that I am not saying that the bankers did not play a part in the crisis, that they should not be getting large salaries at taxpayers expense, but the way that all of the blame is being heaped upon them is pure scapegoating. This is not a trivial matter, as it means that the others that were responsible for creating the mess are the very same people who are supposed to be resolving the mess, and often with policy that just replicates the original problem in new forms - in other words, the government borrows more as a stand in for the fall in consumer borrowing.
Without the economists, politicians and central bankers taking their blame, they can continue in their positions in which they can continue to cause so much damage.....
Note 1: For those who might mention that Obama is a new pair of hands......take a look at his economic team and policy....
Note 2: A rushed post, so I am sorry that I can not respond to the many good comments on my last post. I will try to catch up....