Everywhere we look, things are out of kilter, like a house of mirrors, where nothing quite looks the way it should. We have to check our glasses to make sure it isn’t us.
And, yesterday, we also felt…deserted…alone…abandoned by our friends.
Stephen Roach, chief economist at Morgan Stanley, threw in the towel. He was the last bear standing on macroeconomics matters, according to the Guardian (The Guardian editors do not spend much time in the woods).
Like us, for many years, Roach lamented and bemoaned the “unbalanced” world economy, which he saw becoming more and more unbalanced as time went on. But recently, it seems that it is Roach himself who has become unbalanced; yesterday, he imagined balance being restored by the coordinated efforts of bureaucrats at central banks all over the world.
Actually, the relationship between East and West is not so much imbalanced as it is parasitic. One side makes; the other side takes. One saves; the other borrows. One grows rich acting poor; the other grows poor believing itself rich.
In the West, people live beyond their means and expect to continue doing so at least until the Second Coming. Their top economists tell them that they have nothing to worry about, no day of judgment. Savings? Who needs that? We have something better — credit!
But where does the credit come from, without a pool of savings from which to draw? Well, it comes from the East — where people do save. Here, the Wall Street Journal weighs in with some facts. Developing nations already hold reserves — mostly in dollars — of $2.9 trillion. China, Russia, and Saudi Arabia are laying in huge supplies of capital — earned from the export of oil and manufactured goods. Most of this money was once owned by Americans; now, it is owned by foreigners. Every day, more than $2 billion, net, shifts further from one end of the teeter-totter to the other — from the chunky spenders down to the skinny savers.
China, Russia, and Saudi Arabia may not be the world’s most developed nations, but they weren’t born yesterday. And, what they don’t know between them — about mismanaged economies, political corruption, incompetence, and worthless paper money — is probably not worth knowing. Sitting there, surrounded by trillions of dollars, they are likely to wonder what each one is actually worth. And then, they are likely to turn their gaze to the country that issues them — and wonder again.
“What is behind the dollar?” they will ask themselves. Just faith, comes the answer. But faith in what? Is it in the financial future of the United States? Talk about unbalanced; no nation in the history of the world has ever had such a big gap between what it earned, and what it spent. U.S. public and private finances are out of whack, and on the evidence, becoming more and more out of whack with each passing day. What faith can you have in its paper currencies? Its notes? Its bonds? And then, the foreigners turn to the Middle East and wonder even more.
In Mesopotamia, the Americans’ war against “nobody-in-particular” is also lopsided. The Untied States is the world’s only superpower, and probably the most powerful nation that ever existed. Against the most sophisticated fighting force ever assembled, the “nobodies” on the other side can launch no planes, field no tanks, assemble no armies, and dispatch no ships. An estimate from the Pentagon is that they have no more than 10,000 partisans, most of them neither seriously armed, nor seriously trained, nor seriously led.
Still, it is an incredibly expensive war — but only on one side. The United States will spend about $120 billion this year alone; the enemy, whoever he or she may be, spends peanuts. Yet, despite the imbalance, “nobody-in-particular” seems to be winning.
That these imbalances will eventually be resolved, we do not doubt. But they are likely to be settled more or less as they were created — by agile individuals and flat-footed official intervention.
u2022 So far, we are enjoying this 21st century. Except for the World Trade Center, wars in Afghanistan and Iraq, and the new conservatives — what’s not to like?
True, so far, the new millennium has not been kind to investors. Stocks are down — especially after inflation is taken into account. So are most other investments. Housing has done well for most people, but you have to live somewhere. The only way most people can release the gains in their houses is by leaving the country, dying, or borrowing against them. Of the three choices, most have chosen the third, which is why the next few years of this century promise to be more disagreeable than the first six.
We approve of “rebalancing, ” but the world economy is not a wheel. You can’t put it on a rotator and rebalance it by adding lead weights. Instead, it is made of millions of individuals, who have made financial decisions based on what they saw before them. When the going was good…they went. Americans took advantage of loose credit conditions to go deep into debt. Rebalancing requires them to end up less in debt, which means they will have to do something that will be unpleasant for most of them — reduce spending.
Cutting consumer spending will also turn out to be unpleasant for America’s policy makers and officials, for it will mean a slowdown in the U.S. economy…possibly a very severe one.
What will people do? Where will they turn?
u2022 Last night, we went to the theatre. Maria’s drama school performed the Man of La Mancha.
We had never seen the play. We were prepared for the music, but not for the rough handling of the whore, Aldonza, by the mule drivers at the bar. Not when our own daughter was playing the part. We wondered how other fathers must feel when their children perform in front of a crowd. We know how we felt: like stopping the show! Nobody treats our little girl like that!
It is a touching story. Don Quixote sees Aldonza in a way no one ever had…
“Oh, pure virgin,” he calls to her…as the bar breaks out in laughter. Of course, Quixote is unbalanced and hallucinating. The world is not what he imagines — or even what he can imagine. But people are infinitely complex…like truth itself. And in Aldonza, a tough, hard-swearing prostitute, is hidden a pure virgin, too. It brought a tear to our paternal eye when the dear girl came out.
After the curtain went down, we went backstage to congratulate the cast, but we still haven’t quite forgiven the mule drivers.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.