Wednesday, November 5, 2008
Asian Co-dependence and the American PermaBubble
The Yen has gotten a lot of attention lately, as the currency desperately tries to rise against the dollar, and the Japanese government desperately tries to keep it tamped down. In my previous column, I hinted at the propensity of the Chinese and Japanese governments to keep their currencies down against the dollar. In the absence of their prodigious efforts, their currencies would rapidly appreciate against the dollar, and their goods would be far too pricey for Americans to buy. Keeping their own money down allows them to maintain an artificial market for their goods in this country. But why is the market artificial, and why would they want to maintain it if it were so? Isn't that irrational? Ah, now we get into the meat of the discussion. The market would not be artificial, except for one crucial factor: both countries do not want to import anything unless it is absolutely necessary, particularly Japan. Although their export markets are wide open, their imports are strenuously regulated, and the result is that far more goods flow out than in. Unsurprisingly their currencies tend to rise as a result, as their buyers need yen to make their purchases and flood currency markets with their own respective moneys in order to get them. This is old news to most folks. Why the hostility to imports? Any number of reasons: "job protection," nationalism, politics, basically. "Culture" would be the broadest answer. This is pretty typical of most countries. Asia is only remarkable in the degree to which the behavior persists. Since Commodore Perry forced open the ports of Japan in 1854, after centuries of being almost absolutely closed off to the West, not much has actually changed. Presently, Japan has enormous exports, and imports only what it has to, mostly commodities and raw materials to feed its industrial needs. It even grows all of its own rice on some of the most precious and expensive real estate in the world. No wonder housing costs are so high... America, on the other hand, has a far more open philosophy, and although there are barriers, in general goods flow more freely here than in most places around the globe. Again, old news. In any event, the situation creates a pressing need: what can Japan import from America in order to keep Americans buying its goods? It has to import something! The answer that Japan and most other countries have come up with: US Treasury Debt Certificates. And thus we come to the controversy. This persistent refusing of material imports and buying of US government debt has lead to a dangerous co-dependent relationship. Asia floods American ports with endless supplies of perfectly good stuff, and America exports promises to pay, sometime, someday. Further, the persistent, irrational buying of treasury debt by foreign countries, often by third world countries, creates persistently suppressed interest rates in America. The debt is snapped up not because of its intrinsic value, but in the interest of maintaining the status quo of the trade relationship. Without additional purchases, industries would cease to be profitable, workers would be laid off, and there would be political hell to pay. One of these statements should catch the ear of any student of Austrian theory: suppressed interest rates produce the irrational pricing which leads to the bubbles of the business cycle. Indeed, America has become the beneficiary of a massive influx of credit over the past several decades, and it shows. It shows in unprecedented levels of consumption with friendly terms for consumer debt, unprecedented economic activity, and unprecedented lifestyles. It has every visible indication of that most desperately sought condition: prosperity without production, wealth without effort. At the other end of the relationship, Asia works its fingers to the bone, putting in long hours in factories to produce the goods for us to buy. This isn't healthy. I don't really know what to make of the situation. It many ways, it bears every resemblance to the old style collection of imperial tribute. One country labors away, shipping its goods to the imperial power for essentially nothing. On the other hand, the relationship is voluntary, and it equally appears as some form of perverse inverted welfare scheme, in which the poor give a portion of their earnings to subsidize the rich. In any event, it is what it is, and what it is is completely irrational. The question of the day is: will it and can it last? As I have previously remarked, America is about to vastly increase its debt levels, putting $2 trillion in treasuries on the market in only two years. The yen already wants to rise. Will these foreign governments continue to purchase enough debt to keep currencies in line with present values and American interest rates low enough to perpetuate the system? Can they? At what point will Asian governments decide that enough is enough, it is time to collect on those bills? Or are they so culturally stuck in their ways that they simply never will, and will accept the phony payments that the US is likely to send their way just to perpetuate the present system indefinitely, effectively resigning themselves to slavery? I will come out and say what it seems nobody else is willing to say: Asia's export markets, and especially China's, like America's housing market, are not engines of growth, but economic cancers, sucking away precious resources from far more rational and economically sustainable endeavors. Just as America's housing market was subsidized by low interest rates, in part from the lending of these very nations and in part from our own government, so are Asia's export markets being subsidized by their own respective governments. It is a stupid game that makes everybody poorer, and it needs to end. If Asia is not willing to let in goods from other nations, it likewise should be willing to accept lower, rationally sustainable levels of exports. It certainly should not manipulate markets in a way that implicitly places an inconceivably stupid level of trust in another nation to pay back on an insane debt level that never falls. This is the true nature of American Imperialism: the empire of the dollar. It is a voluntary empire. Tribute through inflation. The participants know exactly what is going on, and they participate anyway. I have said it many times, and I will say it again: culture matters. Asia's cultural view of debt and markets leads them to pursue this type of behavior, properly called mercantilism. Coupled with America's very different culture and views, an ugly, co-dependent relationship develops which is bound to end badly. It didn't have to be this way. You don't get rich by sitting on an ever expanding pile of money, and you don't get rich by running up unsustainable debts. Wealth is the product of ever expanding productivity and rational resource allocation best produced by free markets. This situation is neither. Mark my words: Asia will get stiffed. America will default, probably through inflation. The FED will buy the debt when nobody else will, expanding the money supply, reducing the value of the dollar, and inflating away what is owed down to nothing. Everybody will get burned, and it would not surprise me if it did not turn into a prolonged conflict. We will all be hurt, though China will be hurt immeasurably more. This will likely be their Great Depression. But remember what happened during the last such depression: America rose up to become the supreme global power. America had accumulated the industrial base exported by Europe, just as China has inherited America's exported industries. America will come to regret having participated in this grand deception. Take home lesson kids: if you want to trade, demand stuff. Do not lend, do not accept debt as payment. Do not accept money. Do not trust anyone to pay old bills. Demand stuff in exchange for stuff. If you do not like what the other party has to offer, do not trade. Some staggering statistics about the trade deficit. Scary, very scary.