We have read reams of "analysis" and heard innumerable warnings about the weakness of the American financial position vis-a-vis the profusion of creditors who have purchased our debt and who hold our I.O.U.s. In one sense, we have no problem with this analysis. The dire warnings about our relative weakness, about our vulnerability in depending upon foreigners to continue accumulating our currency and holding American assets, and the risk to the American economy should these foreigners decide to reduce their dollar denominated asset holdings all possess a considerable validity. What they gloss over, however, is a different facet of what is essentially a SYMBIOTIC RELATIONSHIP between America, the consumer, the borrower, the overleveraged, overindebted spender, and the more frugal, better energy-endowed, hungry foreign creditor countries. More specifically, current developments cast a spotlight upon a very real, if widely ignored, aspect of the economic balance of power between the United States, on the one hand, and its creditors, energy suppliers, and sources of cheap consumer items on the other. This aspect is: THE POWER OF THE WEAK. Yes, we are financially fragile. But we are also: TOO BIG TO FAIL. Our foreign creditors, foreign asset holders, foreign investors, foreign economies, foreign exporters DEPEND UPON US for their own prosperity.
The current situation unmasks quite clearly the DELUSION of the "decoupling" of Asia from the American economy, as well as the ILLUSION that the energy-rich states and consumer goods and services exporters are getting richer and are moving into the core of the global economic system, even as we are being pressed increasingly toward the margins.
Nothing, in fact, could be farther than the truth. Nothing brings this home more forcefully, we think, than today's announcement that Mother Russia will be buying Fannie Mae and Freddie Mac securities with state funds. This revelation transcends the fascinating. Here is our arch-foe, Putin's Russia, the bastion of resource nationalism, the world's largest oil producer, source of Europe's gas supplies, the newly emergent and rising power (as we, supposedly, decline and submerge) buying our Fannie Mae's and Freddie Mac's. Is this noblesse oblige? We think not. Putin and his crassly capitalist country are NOT gentlemen. Nor are the assorted Arab oil producing states, which are continuing to pump a growing portion of the loot they have so assiduously extracted from us back into our sinking marquee financial firms, despite the fact that there investments in said firms have already cost them quite a few billions in losses. And then there is Temasek, the sovereign investment arm of Singapore, an entity known neither for its philanthropy nor any particular largeness of spirit. Are these investments simply the de rigeur status symbols of these parvenu states and regimes? We think not.
What then is going on here? The answer, dear Brutus, lies not in the stars, but in us. WE ARE THEIR GOLDEN GOOSE. Apart from Japan and the EURO zone countries, the U.S. is the world's great CONSUMER, and, therefore, the ENABLER of Asian, and Middle Eastern, and Russian, and eastern European, and African (if it ever emerges) economic growth, rising GDP, rising living standards, RISING CONSUMPTION OF OIL, METALS, AND PROTEIN-RICH FOODSTUFFS. The oil and cheap goods/services exporters have been able to develop their infrastructure and their industrial capability, BECAUSE, AND ONLY BECAUSE, they can sell here. If Americans can no longer buy, THEY WILL REGRESS ECONOMICALLY. We read, and hear about the 200 million person Chinese middle class, the emerging Indian middle class, and emerging middle classes elsewhere in Asia, Russia, and eastern Europe. In truth, the income and purchasing power of these "middle classes" do NOT bear the remotest, the palest resemblance to the American and Japanese consuming classes.
The truth of the matter is that the economic well-being of foreign creditor countries and of those foreign countries who export to us and accumulate huge trade surpluses DEPENDS AS MUCH AS OUR OWN upon a healthy American banking system, a LIQUID and SOLVENT American consumer, and the continued prevalence of the borrow, spend, and borrow more mentality of the American Joe. Irony of ironies, the presumably "rising" economies of Asia and eastern Europe are at almost as much as risk as are we from the SUB-PRIME CRISIS, the prospective failure of the muni bond insurers, the freezing up of the auction bond market, the continuing decline in the value and marketability of mortgage-backed bonds, the prospective decline in market values and salability of CMBS, the sinking junk bond market, the deepening illiquidity of our banks. THIS IS THE REASON for the piecemeal rescue operations emanating from abroad. They cannot afford for the golden goose to die, or even to become briefly incapacitated, or less productive (ie., voracious in its consumption and borrowing). A new era of financial prudence here would severely reduce their growth prospects, darken their futures, take the wind out of their sales.
Moneysage 2008 ©
