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
