We’ve created a game where the winning strategy is to convert debt into real assets as fast as one can accumulate that low-priced debt. The losers will be holding those worthless pieces of debt paper when the music stops. Those who own and control real assets bought with cheap debt will rule the world, if they can keep it. And we call this progress? Red sky at morning, sailors take warning…
Excerpted from the WSJ: (subscription req’d)
China has built up an astounding mountain of monetary reserves: $3.3 trillion, approximately 60% of which comprises U.S. government securities. The U.S. has accumulated the world’s largest international debt: $15.9 trillion. Each government eyes the trajectory of the two stockpiles with trepidation—the Chinese fear a collapse in the global purchasing power of their dollar hoard, the Americans a collapse in funding for their debt. The U.S. accuses China of “manipulating” its currency, keeping it artificially low to stimulate exports and discourage imports, while China blames U.S. profligacy and lax monetary controls.
Many hope that the International Monetary Fund, created at Bretton Woods, can be the catalyst for a new cooperative monetary architecture. Yet history suggests that this won’t occur until the U.S. and China come to the conclusion that the consequences of muddling on, without the prospect of correcting the endemic imbalances between them, are too great.
Meanwhile, trade tensions may grow much worse—as they did in the 1930s, during the last great international currency war. China’s recent bilateral agreements with Japan, Brazil, Russia and Turkey to pursue trade without dollars could be a worrisome harbinger, insofar as each would be more likely to undertake global trade discrimination in order to balance its bilateral trade than to stockpile other currencies. The U.S. had sought to eliminate this damaging stratagem permanently at Bretton Woods; it may soon re-emerge.