The most important thing you won't hear about in the debate

I just can't bring myself to write anything real so I'm going to write about the world instead.

There is something interesting going in the world today. There's a symbiotic relationship happening that threatens to destabilize this whole system that we've built everything on. You won't even hear it mentioned during the presidential debates. Economics is too bland. It doesn't make a good sound bite.

I think its a good rule of thumb that just about anything important you have to say doesn't make a good sound bite.

I haven't watched the debates. I'm Canadian remember. As an aside though, I wonder whether they've mentioned the social security problem that the Americans have bubbling to the surface down there. I suppose not. Do you realise that the budget surpluses of the 90s were strictly a function of a surplus in the social security program at the time, and instead of saving those surpluses to fund the future deficits which were inevitably going to happen as the population aged, your government (and you can't blame this one on Bush, it was a Clinton deal) had the foresight to spend those surpluses, basically saying we'll worry about the future when it comes. Of course, when the future comes I fully expect that the government will say we just don't have the cash to fund social security in its present form which will technically be true but only because they used the surpluses they had back in the 90s and then turned them into deficits in the 00's. No worries though, at least your dividends aren't over-taxed. That's what really matters.

But that's not what I want to talk about.

What I want to talk about is a symbiosis. And not an environmental one. This is the symbiosis between the US and the rest of the world. You may have heard, at least if you watch business TV, about the current account deficit that the US is running. Its one of those things that gets talked about, but nobody really understands what they're talking about. I don't even think some of the experts that talk about it understand it. Its just this big monster (or harmless little dove, depending on your bias) that lurks out there in the shadows.

The funny thing is, its not really that hard to understand. Let me see if I can explain it quickly. And then I'll explain why its important. The current account of a country is the measure of how many dollars for goods and services are exiting the country against how many dollars for goods and services are entering a country. Basically, that's it. So if you buy a foreign made good, your money gets shipped to that foreign supplierand now that foreign supplier holds the dollar in his hands and you hold your electric toothbrush in yours.

Now if you have a current account 'deficit', it just means that if you sum up all the trade coming in and going out of the country, you have more trade coming in. And that means there are more dollars going out.

And that is what the US does.

The offshoot of this is that you end up with a lot of foreign suppliers holding US dollars. But they don't want to just hold dollars. They want to do something with them. Well, they aren't going to buy something from the US, because its too expensive. So they do the natural thing with them. They convert them into their own currency.

I'm simplifying of course. But that's the just of it.

This creates a problem. See, when all you start converting all these dollars into the domestic currency of the surplus country, that causes the domestic currency to rise. Its supply and demand - now there's more demand for the domestic currency so it goes up. But that's not good for the surplus country, because they make their bread and butter by selling cheap goods to the US, and they do that because their currency is worth much less then the US dollar.

Obviously, something has to be done about this. And something is. The government steps in. Well, the central bank, but same thing. The central bank can offset this effect by printing money and trading that money for those extra US dollars that keep coming in. See central banks, in today's world, can print as much money as they want. The only thing stopping them is inflation. And luckily for most of these surplus nations there's lots of poor people in these countries so they don't have to worry too much about wages going up and inflation going up (or in Japan's case because nobody in the country buys anything). Its a wonderful world isn't it?

So anyways, the central banks print money, the domestic currency doesn't appreciate, and they can keep selling stuff to the US. China does this big time. Japan does this big time. The other asian nations do it little time. But everybody's doing it.

Of course, now the government of the surplus country has all these dollars. What are they going to do with them? Well, they do about the only thing they can do. They give them back.

Well, they don't just give them back of course. They trade them. They trade them for US debt. Consumer debt, corporate debt, government debt. Anything that will pay interest.

So the dollars make their way back to America.

What do you think that does? Well, there's all these dollars just itching to get put back into something in the US. They want to be traded for something that pays interest. The life blood of banks and credit card companies and mortgage companies is loaning out money. And there's are this money just waiting to be loaned. So of course, it gets loaned out. People and companies and even the government and its agencies take on more debt.

This is why you can get a credit card for your dog with a $50,000 credit limit. Its because there's foreign country's out there with US dollars to burn that need to put those dollars somewhere so they want you to take them if you'll pay interest on it.

Its not quite that direct of course, but you get the point. The bottom line is that the US keeps going deeper and deeper in debt. The the foreign country's keep funding it.

Why do I call it symbiotic? Because it is. All this credit creation spurs on people to buy more foreign made goods and that causes more dollars to go out of the country and that causes more dollars to get recycled back into the US in return for debt and on and on and on. The foreign surplus country's can't afford to stop giving back the dollars because their economies depend on Americans buying and would collapse without them. And US consumers need the foreign country's to satisfy their craving to buy, buy buy!

Its elegant really. In some really strange way. Until it all falls apart of course. When that happens, it'll be chaos.

And you won't hear a peep about it in the presidential debate.
- posted by Sigurd10/07/2004 07:33:00 AM