Why Wonder

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In
just twenty-eight trading days to mid-October, Y5.1 trillion – around
$43 billion – in outflows from Japanese accounts were registered
in the MOF numbers. That's $340 dollars for every Japanese in a
month. It's also equivalent to nearly 5 months' total personal savings
for the whole US of A, at the average rate for the last year.

True,
around a fifth of that was recycled back, but a great deal more
has probably been borrowed short-term to sell for Dollars and Euros
and Ozzie and goes unrecorded.

This
means that an awful lot of what has happened of late in the rest
of the world's bond markets – and now, by diffusion, in its stock
markets – is largely due to the fact that the BOJ has kept around
Y8 trillion in reserves in the system each day, with little viable
outlet for them at home.

One
of these days, the Japanese will wake up to the fact that they could
discharge a good measure of their crippling debts by simply foreclosing
on their neighbours. In fact, maverick Tokyo governor, Ishihara,
has – not entirely facetiously – suggested that before now.

It
does, though, point out the ludicrous nature of Dollar Imperialism,
that the Japanese continue to stack up a vast store of external
assets, even as their own fiscal and monetary death spiral maintains
its steep downward course. Incidentally, this means that Japan has
already effectively underwritten 2 times more US military spending
than it did in the Gulf War.

In
what was one of his more lucid speeches in recent years, Greenspan
extolled the virtues of globalization last week, arguing cogently – for once – that the international division of labour this entailed
ultimately enriched us all.

What
he failed to address, in an otherwise almost Austrian speech, was
that what people have come to rail at as the unfair practices of
the current world order is not so much global capitalism (though
they may not themselves be aware of this, since the intellectual
framework for their dissent is sorely lacking), but world financiering.

Set
aside for a moment the enormously debilitating effect of the greatly
lesser degree of individual freedom and the lack of respect for
the sanctity of private property in many such nations – which, you
UN moral relativists should note, is their fault, not ours!

Much
of the remainder of the immense problems arising from the increasingly
contentious gap between Western Haves and Third-World Have-Nots – one for which we must admit culpability – lies in the perverse
functioning of the international monetary system.

Greenspan
acknowledged the symptoms of this, but failed to recognize the cause
and, in so doing, he recommended the wrong treatment.

"Extensive
short-term foreign currency liabilities of financial intermediaries
that are used to fund unhedged long-term lending in a domestic currency
are tinder awaiting conflagration. This is especially the case if
foreign currency reserves are inadequate and exchange rates are
fixed… Periodically, as an economy borrows its way to the edge
of insolvency with debt denominated in foreign currency, government
debt-raising capacity appears to vanish virtually overnight. It
is this vanishing capacity that characterizes almost all financial
crises. Lending institutions will provide funds beyond the immediate
visible short-term cash flow of a borrower only if they perceive
that maturing debt will be capable of being rolled over. The first
whiff of inadequacy in debt-raising capacity induces a run to the
exits – not unlike a bank run.."

What
he does not – indeed, as Chairman of the Federal Reserve, cannot – admit is that such irresponsible lending could not occur if he
and his peers had not abdicated all responsibility for an inherently
dangerous fractional reserve banking system, nor had failed to promote
the implementation of bankruptcy procedures for sovereign nations
which involved the private sector in the same way that they do for
corporate or personal failures.

Ever
since Walter Wriston's epochal aphorism that "sovereign nations
don't go bust," the American – and increasingly the rest of
the Western – business model has been founded on a kind of GSGE
model – a Government-sponsored General Electric.

Essentially,
the finance available drives the trade done. US goods are shipped
abroad because the finance comes with them – even if they are second-best.
Jack Welch may only have been interested in businesses in which
he was in the Gold or Silver position, but more often than not,
it was GE Capital's Green which got him there.

Naturally,
once the locals are awakened to that sunny DisneyCola suburbia they
see depicted in their media – especially those earning high local,
if low global, wages in the new East India Companies' factories – they aspire to such a lifestyle and the GSGEs are immediately
in there, lending them the money with which to build their dreams.

Given
these nations' less free markets, their often-paternalistic (if
not outright socialist) governments and thus their lower scope for
the entrepreneurial generation of real wealth, this leads first
to a virulent credit boom and then an inevitable credit bust.

But,
let the GSGEs not worry. Indeed, those left scrambling for a chair
when the music stops are often local banks, who were formerly transforming
offshore hot money into onshore, long-term, fixed liabilities, but
who now find they have no access to the external funds needed to
carry them.

Monetary
collapse follows, wiping out savings and destroying balance sheets
(while making real assets and labour mouth-wateringly cheap, whether
to foreign vulture funds or in situ multinational employers). Socialization
of risk – ie western taxpayer conscription – occurs next as the
IMF loans pour in – accompanied by draconian conditions to enforce
debt peonism – and the GSGEs have a whole new range of options to
pursue.

The
irony is that this is so powerful a force that it reveals Wriston's
words as completely dialectical. Sovereign nations are stripped
of any effective sovereignty (think Argentina) and do go bust, though
their liabilities persist forever.

Few
major-league banks and brokers ever really suffer by the time we
account for taxpayer-indemnified debt-for-equity swaps, roll-overs,
and repackagings, not to mention the wholly disinterested advisory
fees to the debtors from the other side of the Chinese wall(!)

And
here comes the most delicious irony.

What
is the prescription to avoid their heartache – actually our boon
since it conveniently commits endless cheap productive resources
to the western consumer market, so keeping down u2018inflation' and
thus encouraging a maintenance of easy money (which was probably
just made easier in the preceding crisis), boosting asset prices
and fostering illusions about an economic miracle?

Back
to Greenspan: "How then does an emerging-market nation obtain
and sustain debt-capacity credibility? First, it needs to create
a much larger relative reserve buffer than that of a developed nation – which
has a larger capacity to draw on real resources, through taxation
if necessary, to make good on its obligations. Nations that have
met the market test no longer need to put up u2018collateral' to certify
their financial prudence. Of course, even adequate or outsized reserves
may not be perceived as sufficient for some, if the political system
is judged unstable."

Let
us recast what Greenspan is both saying and leaving unsaid:

"We
were foolish enough to allow you too many Dollar liabilities and
you went bust. Now you must sweat to pay them off in low local currency
earnings by sending us a great surplus of cheap goods. But you are
not allowed to swap those goods for your IOUs directly. Oh No! You
must hold our resulting liabilities as your reserve assets and lend
us them back – by buying Treasuries, Agencies and corporate debt – much more cheaply than you yourselves can borrow."

"Our
people borrow since they run a huge goods deficit. Our people also
borrow because the bulk of our monetary inflation now goes into
asset prices alone, creating paper prosperity and generating more
debt collateral. All this keeps our financial Titans happy."

"When
not lending to our people directly to buy the fruits of your labour,
you lend to our banks – the ones to whom you owe money – and they
take your cheap money, add 1000 basis points, or so for the u2018risk',
and charge it back to you, keeping you hopelessly slaving just this
side of insolvency, but out of range of the hope of discharge."

"We
call this arbitrage. We hypocritically laud a free market (whereas
there can be nothing u2018free' about a fiat money, fractional reserve
regime). We are Lords of Creation, Nabobs in your benighted provinces.

"You
call this serfdom. You erroneously decry u2018capitalism' or u2018liberalism' – erroneously, because none of this has anything to do with what
those terms truly imply – the sovereignty of the individual consumer
and the accumulation of a wealth-enhancing stock of borderless private
capital to serve him.

"We
wonder why you hate us enough to do us to screaming, fiery death.
You wonder why we wonder."

October
31, 2001

Sean
Corrigan [send
him mail
] writes from London on the financial markets,
and edits the daily Capital Letter and the Website Capital
Insight
.

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