What a wonderful world. The sun is shining neither in London nor in Paris, but it must be shining somewhere this morning. Still, it is springtime in both cities. Birds sing in the trees. Lovers stroll in one another’s arms.
The dollar is up. Stocks are up. Houses are up. Americans still spend more than they can afford. But their friendly suppliers in Asia keep extending credit. As reported here last week, Japan printed up an additional 35 trillion yen between 2003 and the first quarter of 2004, just so it could trade them for dollars…and lend it back to the United States. This dollar-buying/lending spree helped keep interest rates low in the United States…which helped expand a bubble in house prices…which gave Americans something to borrow against in order to continue spending!
In New York, an analyst describes Wall Street’s upbeat mood: “People are beginning to realize, ‘You know what, this economy does have some legs to it,’ and companies continue to benefit…Where in the world do you continue to find good growth these days? Increasingly, it’s here in the U.S.”
Meanwhile, the U.S. military keeps a vigilant eye…making sure that no sparrow falls anywhere in the world that might upset the spread of globalized commerce in the Pax Dollarum era.
America’s system of imperial finance may have no flaws, but its perfections are devastating.
The “growth” that investors so admire is not a growth in productivity…or in productive capacity…nor in profit-making capacity…nor in wage-earnings. The growth is a growth in consumer spending; and since there are neither savings, nor earnings, with which to pay for more spending, it is a growth in debt.
No one bothers to explain how a person can “consume” wealth…and end up with more of it than he had before. It is just one of those many mysteries that must be left to the gods. It is the oddest kind of growth, a perverse kind of growth in which the grower gets smaller with each day.
Nor is there any explanation for how the entire American economy could owe its Asian suppliers more and more money and yet still be a model of “good growth.” But it was not good growth at all, but bad growth. It is the kind of growth you achieve just before you go bankrupt…or the fun you have just before you go to Hell. Imagine a church treasurer who runs off with the choir mistress and the new steeple fund; he sends back a postcard from Las Vegas: “Enjoying much personal growth. Have taken up smoking…drinking is fun too. Gotta run…gotta hit the slots while I still have some money left.”
Spending money you don’t have is not disagreeable. The disagreeable part comes later.
For the moment, Americans salute their imperial standards. They gratefully paste the flag to their car windows, their jackets, their hats, their beer mugs, their shirts and even their underwear. Americans are proud of their empire — and should be. Without it, they could never have gotten so far in debt. What central banker would fill his vault with Argentine pesos or Zimbabwe dollars? What drug dealer or arms seller would want Polish zlotys in payment? What insurance company would want to buy Bolivian or Kyrgistan bonds to cover its long-dated liabilities?
The dollar has not been convertible into gold for 34 years. Yet, people still take it as though it were as good as the yellow metal — only better. Ultimately, lending money to a foreign government is a bet that the government will put the squeeze on its own citizens to make sure you get paid. The United States doesn’t even have to squeeze. When one foreign loan comes due…other foreigners practically line up to refinance it; it is as if they were bringing pastries to an extremely fat man…just to gawk and wonder when he might explode.
• Charlie Munger: “The present era has no comparable reference in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah.”
We didn’t know Charlie was that old.
• Liberation, the French leftist newspaper, is worked up this morning by “The Specter of Social Dumping.” What it means is that workers from Eastern Europe are coming to France and taking jobs from French people at lower rates of pay. Polish plumbers, Portuguese masons, Czech truck drivers…”foreign” workers are all over France. And no wonder. Wage rates are lower in the East. So companies from Eastern Europe are able to underbid their French competitors for the same jobs.
We have some personal experience of this. We can’t resist a money pit of old stones, and we found a deep one in Normandy; we bought the old house in January. Now, we are fixing it up. We were prepared for over-runs…we thought the renovation might cost twice as much as we estimated. Instead, it is turning out to be nearly four times as much. Naturally, we look for the artisans and contractors who can give us the best prices. In one instance, we found a company from the Czech Republic that would replace the windows at half the price of the French company.
All over the world, dear reader, globalized competition is driving down labor rates. No doubt, this very minute, there is some poor sod in Mumbai or Calcutta preparing to write this column for a quarter of our own measly stipend.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.