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Fortune Cookie Monster



With the excess dollars generated by their trade surpluses, the Chinese and Japanese (and a few of the Europeans) buy our treasury debt; we, as a country, then take that money and buy Tomahawk missiles to police the world, Chevrolet Suburbans to cart the groceries home from Whole Foods, and new plasma TV's to watch Desperate Housewives. There are many more layers to this process both before and after the above (admittedly oversimplified) transaction, but you get the point. The United States, as a nation, borrows and spends the rest of the world's savings (about 80% at present) on things we want to buy now. Whether we can or will ever repay that debt is a moot point at present. We borrow, they lend. It's that simple.

Simple insofar as its description; not so simple at all in terms of why. Most creditors would perform some sort of credit analysis - utilizing some rational, economic calculations of interest and principle default/payment risk - before the transaction. Not so the Chinese, Japanese, or Europeans. They aren't using any sort of rational economic calculus. At least, I don't think they are.

Instead they have their own non-economic imperatives. China must worry about the social unrest that would ensue if there weren't enough jobs available to sop up the massive population shift from rural villages to cities. Their number one concern is jobs; making cheap plastic toys, plasma TVs, and fabrics for those leather seats in the Suburban is more important than any amount of money they might lose if the U.S. cannot or will not pay back its debts (or if we attempt to inflate our way out of those liabilities).

The Japanese worry about the ongoing decade-long deflation they have been battling (and losing) as well as potential geopolitical concerns with a belligerent North Korean neighbor. Funding the U.S. defense budget via $/Yen interventions might be a two-fer: support their export industries and keep U.S. GI's close enough to protect them in case Kim Jong Il goes mad.

The Europeans are a more difficult lot to figure out. Perhaps they are partnered up with the U.S. because they realize if we sneeze they get the flu. Yes they have their own domestic demand, but a serious retrenchment in U.S. consumer demand (which represented 96% of worldwide GDP from 1996-2001) would seriously harm their own economy, forcing them to deal with their own future social liabilities (unions, pensions, an aging population, a massive bureaucracy, etc.). Perhaps too, they simply covet the military protection that Bush et al are willing to dole out.

This group of four is an unholy alliance (well, unholy in an Austrian economic sense): a co-dependent group of business cycle haters bent on denying the free market its due. Today each of the four benefits enormously from the alliance: Chine gets its social cohesion, Japan gets its military protection, Europe gets to delay its social liabilities another election cycle and we get to buy or bomb anything we want without having to really pay for it.

Like all alliances, this one too will end. One of the members will perceive the benefits of partnership to be diminishing relative to the costs of inclusion. It will almost certainly not be the U.S., which leaves Europe, Japan, or China. I could come up with any number of scenarios that could cause such a reassessment on their parts. But the actual specifics - the causal factor - won't be important. Just as the Bretton Woods agreement was abandoned, this current unholy macroeconomic alliance will end too. In the end it will cease because it cannot be sustained indefinitely.

There is an age-old lesson in there somewhere, probably having something to do with the fact that nothing is ever free, even if the governments of the four largest economies in the world say it is. Keeping focused on this 'partnership' should be fruitful in our search for how the imbalances in the global economy will resolve themselves. Once one player blinks, the whole house of (fiat) cards literally falls apart.

Not today. Not tomorrow. But eventually.

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