From today's FT:
Sir, Martin Wolf ("Global imbalances threaten the survival of liberal trade", December 3) notes that the aggregate excess of savings over investment in surplus countries will be just over $2,000bn in 2008. On the very same page, Nouriel Roubini ("How to avoid the horrors of stag-deflation") notes that the overall credit losses from the financial crisis are likely to be close to $2,000bn.
Coincidence? I think not. When there's too much money chasing too few (good) investment opportunities, bubbles are as inevitable as the busts that surely follow.
Dwayne Grant, Glasgow.
Monday, 8 December 2008
"Coincidence? I think not."
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5 comments:
Actually that is an interesting pair of stats.
Does it imply that there is only a set quantum of money in the world economy? (Wealth being different from money). That is, it is impossible to expand the global money supply above the 'natural' rate at which wealth is created? In the example given one would draw the conclusion that there is a $2 Tr bubble of excess credit to unwind - the aggregate money supply will reduced by $2Tr.
So what do the countries with the excess do? They have to spend it don't they. If they hang onto it it will reduce in value faster than it earns interest. If they spend it on foreign investment - which is likely - that implies they will invest at least some of it back into the indebted western economies, so helping the bubble unwind.
Look, I am not economist enough to successfully argue this, but there is clearly something here.
L, I think you have nailed it with this: "it is impossible to expand the global money supply above the 'natural' rate at which wealth is created".
The idea that "they will invest at least some of it back into the indebted western economies" misses the point slightly - the creditor countries (China, Japan, Middle East etc) have already 'invested' the money in the sense that they have been selling us goods and oil on credit. We can't pay them back in cash or in goods (except in the very long term), so their Sovereign Wealth Funds will end up owning approx. £2 trn worth of Western assets/businesses etc.
MW - By 'investing back' I meant 'ending up owning'. In effect they already do own us as money is essentially a promise to pay. An obligation on the issuer. Of course this is a trifle tricky to achieve with fiat money.
The foreign countries will buy our businesses at knocked down prices (value destruction?). We will gain jobs. They will gain investment return. Our payback will be immediate as jobs are paid for today. They will wait longer for their return - investment is patient money. In the end it will even itself out, despite, not because of, the actions taken by Brown Darling.
L, this is already happening, see here, here or here.
"In the example given one would draw the conclusion that there is a $2 Tr bubble of excess credit to unwind ..."
I'm no economist but it seems to me that must be right. Of course not all credit forms a bubble, only the part that can't be afforded. Unfortunately there's a hell of a lot of it and, it seems to me, things can only be stable again once that excess, unustainable credit has been squeezed out of the system.
That's one reason why I fear current problems will drag on a lot longer than Mr Darling suggests. We might technically come out of recession within a year to 18 months but the continued need to deflate the bubble will remain; failure to do so will lead to another bumpy ride a very few years down the line.
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