Broad Oak: your emotional support animal

Sunday, July 19, 2009

Locking the doors

The dethroning of the US dollar as the international trading currency is under way. New bonds issued by the International Monetary Fund in the form of "Special Drawing Rights" are related to a basket of currencies, thus diluting the dollar element and reducing America's opportunity to cheat the world by devaluation.

The same article describes a Chinese proposal to start issuing bonds denominated in renminbi, so that if the dollar does drop against the Chinese currency, all that will happen is that the dollar cost of the capital debt will increase.

It occurs to me that such extra security for lenders may help interest rates to remain lower than they otherwise would be. So the threat to borrowers is not that interest rates will increase, but that debt outstanding will continue to feel heavy, since inflation won't lighten the burden. In fact, the burden of foreign debt could get worse, if the dollar weakens in this new foreign-currency-mortgage era.

Another factor, which may be a deliberate strategy with an eye to the above, is China's own expansion of credit. If monetary inflation goes global - including in the East - then there's less hope that Western businesses could use relative currency devaluation to increase the demand for their goods and services. Manufacturers here will still be unable to compete and debt will grow. Our creditors will own us - we'll "owe our soul to the company store".

It's time to grasp the nettle - bust the banks who got us into this, have a tremendous clearout of debt from the system, reset wages and prices at lower (more internationally competitive) levels, get the people back to work and shrink the dead weight of government and its dependants.

That, or see what's left of our wealth leak away, and then suffer all the above as well - at even lower levels of per capita assets and income.

Doubtless the politically-favoured option is the latter - "Let it all happen on someone else's watch, after we've made ourselves into the New European Aristocracy and gone to our country estates." This would be a mistake. The palace of Versailles didn't protect Louis XVI, nor Waldsiedlung the East German communist elite.

4 comments:

Anonymous said...

SAC: "It's time to grasp the nettle - bust the banks who got us into this, have a tremendous clearout of debt from the system,"

A bit late in the day, no? We could have done that for RBS, Bos, Bradford & Bingley, Northern Rock, but they are now obligations of the British Government.

The clearout should have happened eighteen months ago.

Sackerson said...

Force it back down their throats.

OldSouth said...

Doubtless the politically-favoured option is the latter - "Let it all happen on someone else's watch, after we've made ourselves into the New European Aristocracy and gone to our country estates." This would be a mistake. The palace of Versailles didn't protect Louis XVI, nor Waldsiedlung the East German communist elite.

Well-crafted words.

Here in the US, the same attitude has been operative for a long, long time.

By way of contrast:

I drove home yesterday through central Kentucky, on the old Federal Highway 31W. The once-vibrant towns along the route are folding in upon themselves.

It is tragic to behold. The elites never see it, never will, have no interest in it.

After all, those towns are inhabited by the 'little people'...the ones who are supposed to just 'eat cake'.

Sackerson said...

There's trouble a-brewing, OS.