Economics

[andrewducker]

"[G]lobalisation was triggered by elected politicians, and central bankers, in both the US and the UK," says a report from the New Economic Foundation. "In the post-Vietnam war era, led by Richard Nixon and later Ronald Reagan, these politicians sought ways to avoid making the 'structural adjustments' necessary to the American economy if debts incurred by foreign wars were to be repaid by US taxpayers. Rather, these politicians preferred to disband the existing system of paying off debts by exchanging gold, and opening up capital markets, so that the US could borrow to pay off its debts.

"This new arrangement also allowed them to print the money in which they paid off those debts (unlike poor countries which have to repay debts in foreign currencies like dollars or sterling). British politicians and central bankers were only too happy to act as US intermediaries in the capital markets. Together they constructed a new financial architecture that effectively obliges central banks of both rich and poor countries to lend to the US - by buying US Treasury bills (debt).

"It is US treasury bills that have now effectively become the world's reserve currency - where once that reserve currency was neutral (gold)...It is this international financial system that makes the US administration so arrogant in its refusal to 'adjust' its economy by cutting spending and paying its way...It is this financial system which makes US financiers so confident that the rest of the world will continue to finance their nation's extravagant spending binge. In the words of David Goldman, head of debt research at Bank of America Securities: 'America is at little risk for the foreseeable future, simply because the world's capital has nowhere else to go'(Wall Street Journal, 13 August 2003).

"The Real World Economic Outlook challenges that view. There is now a growing consensus that the vast build-up of household, corporate, state and foreign debts of the US is not sustainable. Some central banks are already switching out of US dollars and into euros. When capital flows shift away from the US, and there are recent signs of this happening, Alan Greenspan may have to raise interest rates to attract capital back into the US to fund the growing federal, state and foreign deficits. Indeed, the bond markets seem to be signalling that they expect this to happen quite soon.

"When interest rates begin to rise again, when debt costs soar both for corporates and households, when defaults and bankruptcies increase more rapidly than now - then the 'tipping point' will be reached."

When that happens...Americans will go bankrupt, their standards of living will be reduced...they will have to save, save, save...and the greatest credit bubble in history will deflate.

Comments

[rahaeli.livejournal.com]

Can I come live with you? I don't want to live here anymore.

[andrewducker]

Sure. It'll be a bit far to visit the rock-pusher tho, so you'd better bring her too.

I may need a bigger flat :->

[heron61.livejournal.com]

I'm hoping that happens soon. The US was a prosperous nation in the 1960s, well before any of that nonsense started, so ending this does not spell long-term economic ruin for the US. Also, under this system Asian countries use the income they receive from exporting goods to the US to buy American debt, which helps keep their currencies weak compared with the dollar. Doing this helps keep the price of Asian goods down in the US. Ending debt export would raise the value of Chinese and other Asian currencies and so help end the vile policy of US manufacturers using third world labor to undercut US labor. This policy started in the 1980s, in the first major wave of US debt export.