by Gary North
Most residents in the United States are addicts. They are addicted to debt.
This year, the U.S. economy is facing a $500 billion balance of payments deficit with the rest of the world, but mainly with East Asia. This annual deficit keeps getting larger.
The government of the United States is also an addict. It will run about a $500 billion deficit this fiscal year, and that doesn't count Social Security/Medicare, whose "trust funds'" surplus revenues are used to reduce the official debt. This deficit keeps getting larger.
To supply the drug of choice — dollars — the loan pushers in the international capital markets dig into their wallets and hand out the money. Why? Because they expect the addicts to pay back dollars or sell them their capital assets. The pushers who want payback in the form of money buy bonds. The pushers who want payback in terms of ownership buy stocks.
To supply the drug of choice — dollars — the loan pushers to the U.S. government dig into their wallets and hand out the money. Why? Because they have been assured by the U.S. government and by economists, most of whom have been trained at government expense, that governments never default. Well, anyway, North American governments never default. "A U.S. government bond is as sound as the dollar." This is true because a U.S. government bond is denominated in dollars. "You can trust the government to repay its debt," we are assured. While it is true that this debt is always growing, it is equally true that, year after year, so is the U.S. money supply. And prices are always rising.
Why do foreign investors buy U.S. government debt? Because they believe what they have been told by U.S. economists. The best and the brightest of the Asians have attended U.S. universities, and they have taken courses in economics.
Why do foreign central banks buy U.S. government debt? Because their banks copied the Federal Reserve System after World War II, and the FED buys U.S. government debt. But why don't central banks buy their own governments' debt instead of dollars? Because they seek diversification of asset holdings. The dollar is the world's reserve currency, and the U.S. government always pays interest on its debt.
But, you may ask, what happens if the Federal Reserve System pumps in money to keep U.S. interest rates low? Won't that push down the value of the dollar internationally? Of course it will. Then won't foreign investors and foreign central banks lose? Eventually, yes, but not immediately. The international value — comparative — of the dollar will not collapse whenever foreign central banks create new fiat money to buy U.S. government debt. This is what China's central bank is doing.
But won't this policy reduce the value of the foreign nation's currency, or at least keep it from rising? Of course it will, and that's exactly what exporters in those nations want. The exporters are pushers of goods. The central banks are pushers of loans. They act as a team.
Americans are the addicts. For the process to continue, foreigners must feed the voracious appetites of Americans for more low-price goodies. America is Wal-Mart Nation. In America, it's Christmas all year round.
halls with bows of money. Fa, la, la, la, la... la, la, la,
Even when the money's funny. Fa, la, la, la, la ... la, la, la, la!
Put it on our cards of plastic. Fa, la, la... la, la, la... la, la, la!
Isn't endless debt fantastic? Fa, la, la, la, la... la, la, la, la!
DOPE PUSHERS AND DOPEY PUSHERS
You may look at this arrangement and conclude that the pushers are dopes. Dope pushers push dope, which produces an inflow of money for the pushers. Dopey pushers push money, which produces an inflow of IOUs to pay money "one of these days, Real Soon Now."
If you addict someone to an addictive drug, he will pay you money today. If you addict him to loans, he will pay you IOUs today. The drug addict eventually either runs out of money or else dies. The loan addict never runs out of IOUs. He will sign those IOUs for as long as there are money pushers willing to lend him the money. He just can't stop signing them. He is addicted.
The drug pusher's business would die if he could ever addict everyone. There would be no more productivity available to extract by means of drug sales. He knows that he operates in a niche market.
The loan pusher's business would also eventually die if he could ever addict everyone. There would be no more productivity available to extract by means of loans. He knows that he operates in a niche market.
The goal of the drug pusher is to extract everything he can from his existing clients, while locating new clients to replace his existing ones.
The goal of the loan pusher is to keep from having his existing clients lose their credit rating, because then their IOUs would fall in value. The problem is, the clients are absorbing ever more of the pusher's assets. The loan pusher's capital is more and more filled with IOUs of his clients.
In the case of the drug market, the addict eventually runs out of money. The pusher consumes the addict's wealth and then moves on.
In the case of the capital market, the pusher eventually runs out of money to lend. The addict consumes the pusher's wealth and then moves on.
The drug pusher doesn't extend credit. The money pusher extends only credit. The drug pusher winds up with the addict's money. The money pusher winds up with the addict's IOUs.
To survive, the dope addict has to conclude at some point, "These drugs are killing me. I have to quit."
To survive, the loan addict has to conclude at some point, "These loans are killing me. I have to quit. I have to get back on my feet before my pusher quits."
To survive, the loan pusher has to conclude at some time, "These IOUs are killing me. I have to quit. I have to find new addicts before this one's credit rating dies."
There are known cases — few — in which drug addicts voluntarily quit. On the whole, however, drug addicts either die as addicts or run out of willing pushers.
There known cases — few — in which loan addicts voluntarily quit. On the whole, however, loan addicts either die as addicts or run out of willing pushers.
BETTER A LENDER THAN A BORROWER BE . . . SOMETIMES
Approximately 3,500 years ago, Moses wrote these words of warning to the Israelites:
The stranger that is within thee shall get up above thee very high; and thou shalt come down very low. He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail. Moreover all these curses shall come upon thee, and shall pursue thee, and overtake thee, till thou be destroyed; because thou hearkenest not unto the voice of the LORD thy God, to keep his commandments and his statutes which he commanded thee (Deuteronomy 28:43—45).
This is a section of a lengthy passage in the fifth book of Moses, which records his words to the sons of the exodus generation, which had all died in the wilderness. Deuteronomy 28 lists blessings for obedience and curses for disobedience, but the section on the curses is four times longer than the section on blessings. I have written a chapter on this passage in my economic commentary on Deuteronomy, which is on-line for free.
In Moses' day, as in our day, most people expect blessings. "We're the good guys." To get their attention, a leader must remind them of curses. "Don't become the bad guys."
By "leader," I don't mean politician. I mean something like "statesman." Statesmen are always in short supply in a democracy. There is not much of a constituency for statesmen. The word "statesman" is applied by politicians to former high-level office holders in their party who are no longer expected to run for office. Jimmy Carter is regarded as a statesman by Democrats because he isn't going to run and could not be elected if he did. They are statesmen only for as long as they don't say anything controversial that might cost their party votes at the next election.
Moses was not a politician. He was not running for office. On the contrary, he was about to die. So, he did not worry about laying down the law, which is what "Deuteronomy" means: the Greek words for the "second" (deutero) and "law" (nomos). (In the original Hebrew, the book is called simply "words," based on the first line, "These are the words.")
Moses was speaking of lenders inside national Israel. The people who exercise political control are the people who supply the capital. They are the money-lenders. Half a millennium later, King Solomon commented, "The rich ruleth over the poor, and the borrower is servant to the lender" (Proverbs 22:7).
What Moses said of domestic economic power applies to international economic power. The difference is this: there is no common civil government. There is no common enforcer of contracts. So, the lender had better pay close attention to the solvency and ethics of the borrower. If the borrower gets too deeply in debt to the lender, the lender's own credit rating is at risk. If the borrower defaults, he may take the creditor with him.
The problem is, central banks are in control of their nations' money supply, nation by nation. Central banks are government-created monopolies, not private, profit-seeking, competitive, risk-assessing companies whose owners have their own capital at risk. Central bankers, who have no ownership in the organizations they run, can buy IOUs merely by creating new money. So, because central bankers are in charge of their nations' money supply, the average domestic investor is at the mercy of the good judgment of his nation's central bankers.
When the government that ultimately controls the central bank favors a special interest group that wants to export goods to debtor nations, central bankers will adopt policies of money expansion in order to keep the international value of their nations' currencies low. They will buy the IOUs of the debtor nations, i.e., goods-importing nations.
For a time, both parties seem to win. The pusher accumulates IOUs that are denominated in the currency of the addict. The addict accumulates consumer goods that depreciate over time. It's the story of the grasshopper and the ants, with this variation: the ants sells their summer's excess crop in exchange for IOUs from the grasshopper, who promises to pay next winter. The grasshopper and the ants are all likely to have a hungry winter. This would make a depressing Disney cartoon.
When a person, a bank, or a nation lends money to an economic grasshopper, he is taking a risk. When the grasshopper becomes the lender's main client, the borrower is no longer servant to the lender. It's the other way around. "Cut off the funds, and I'll declare bankruptcy," threatens the borrower. "Then where will you be?"
At some point, the loan pusher has to go cold turkey on IOUs, which forces the debtor to go cold turkey on the goodies. This event is called worldwide depression. It's not a happy event — like winter in the revised ants/grasshopper story.
I keep thinking of Philip Ahn's final role. Like Richard Loo ("You are surprised I speak your ranguage. You see, I was educated at UCRA"), Ahn did well during World War II playing ruthless but wily Japanese Army officers. Postwar B-rated movies about World War II also kept him out of the unemployment lines. He ended his career playing the monk who trained David Carradine in the art of kung-fu. The old master called his disciple "Grasshopper." Now, that's prophetic!
December 23, 2003
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