The Kindness of Strangers, Revisited

We were happy to have the image of Alan Greenspan patting himself on the back pass before our mindseye over the weekend.  Alan, it appears, gave himself an A+ for the recent performance of the Fed that first let the Tech Bubble grow and burst of its own karma and then deadened the aftershock by dropping interest rates down to their lowest point in more than 50 years.  And, of course, when that didn't quite work, let the dollar slide to lows not seen since the Nixon days against the European currencies.  "See." we imagined Alan saying, "we did it all with smoke and mirrors and so far everything's hunky dory."

There is, of course, a great deal of irony in all this since the same Alan --the world's most powerful puller of levers and strings-- was once the darling acolyte of none other than Ayn Rand, the libertarian author of such books as the Fountainhead and Atlas Shrugged.  Of course, back in those days Alan was also a vocal critic of fiat currencies; that is, paper money backed by nothing but the good faith and credit of the government that prints them.

But Alan, it seems, figured out an angle that nobody else noticed.  Or so we hear today from the usually more sanguine David Ignatius of the Washington Post, who, we imagine, is tired of being beaten up on by the hear-no-evil/see-no-evil crowd in Washington whose dinner parties Alan is more likely to attend these days than the those of the coterie of a popular conservative literary icon from another, dare we say, more naive day.  According to Ignatius the buzz in Washington is around a report co-authored and presented by Deutsche Bank economist Peter Farber to a gathering at the IMF. 

"The fundamental global imbalance is not in the exchange rate,"  Garber told the IMF forum in November.  "The fundamental global imbalance is in the enormous excess supply of labor in Asia now waiting to enter the modern global economy."

Garber estimates that there are 200 million underemployed Chinese who must be integrated into the global economy over the next 20 years.  "This is an entire continent worth of people, a new labor force equivalent to the labor force of the EU and North America," he explains."  

For this reason, the article goes on to say, the Chinese are willing to eat their daily dollar losses (1.5 billion x the % drop) no matter how low the currency gets.  Garber (and his colleagues) parallels this time in history to the postwar period in Europe when the Bretton Woods agreement guaranteed monetary stability by (my words) freezing the price of the dollar and gold at $35 an ounce, locking other participating currencies in a narrow band around the dollar and keeping the dollar window at the Fed open to foreign central banks should they want to trade surplus dollars in for gold.  (It was, of course, just that dollar/gold window that was slammed by Nixon in the early 1970's).

Now, let's take a closer look at this:  Okay, so it doesn't contradict what we've been thinking; i.e., that the Chinese and Japanese are so addicted to making tchotchkes for the American consumer and the reserve dollars they hold in their vaults that they will not be the first to rock the boat. 

However, cold comfort, we say.

Garber has presented us with this truly amazing spectacle of these 200 million Chinese peasants, not to mention all the Asians already holding sustenance wage jobs in the usual sweatshops, all depending on the spending capacity of the American consumer who is already so riddled in debt --nearly $8,000 per family in plastic (non-mortgage) debt-- that even with persistently low mortgage rates the refi market has all but dried up and fixed rate mortgages now only make up 30% of issued mortgages.  In other words, through the magic of Alan A+ Greenspan and company, we have not only expanded debt to record limits but have encouraged home owning consumers to mortgage themselves to the teeth on loans that just might spin out of control. And now we are going to encourage that indefatigable consumer to support the growth of 200 million new jobs in Asia.  Doesn't that kind of give you the fleeting thought that every job in the country is somehow going to be lost in the process?

Perhaps the Asians will  keep taking our dollars even when half the country is on welfare?  In other words, they will pay us to do what we love best!  "Shop until you drop", they will sing as they take more and more ads on television.  In the age of interactive TV's we will be able to order something at all hours and have it delivered within 60 minutes or your money back.  It will be like the pizza delivery business:  "Take your chances, and if we don't get it to you in time, it's yours free!"

It appears that we have nothing to worry about for the next 20 years while all those Chinese finally get jobs off the farm.  We, of course, will continue to lead the world in (besides shopping) developing intellectual property.  All those newly prosperous Chinese consumers will finally be able to sit home and watch a good ol' American action movie.... and get to buy the action figure at the American owned drive-in chop-suey house!

Meanwhile, all the Europeans will be taking those extended vacations they are so famous for, busily spending those now grossly overvalued Euro's on whatever new vice they can create for themselves.  They too, of course, will have lost their jobs but will still have good healthcare thanks to their socialist mentalities.

We have no doubt that Mr. Greenspan and company will find another way to keep the wealth effect going long after falling real wages became the norm and, going forward, interest rates cross below -5%.  Yes, Virginia, the government will pay you 5% to borrow money and, thanks to Garber et al., we now know how it will be financed.

rmb

 

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Copyright 2003 Richard Mendel-Black All Rights Reserved

 

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