By Jack Crooks
Though it is in fashion to blame the U.S. for all the ills now flowing into the global economy, I don't think it's quite that simple.
Remember the "global savings glut." In short, it was the massive current account surplus accumulation of the East thanks to the massive consumption of the West. This was buoyed by the massive "global savings glut" allowing for the creation of rocket science products called derivatives.
And yes, we've seen it all before. In fact, only the names at the top of the central banks have changed.
It's All Been Done Before...
Let's set the stage and go back a few decades. Those of you, like me, with grey hair now unfortunately growing on your face (guess it beats the alternative) may remember that back in the mid-70s our major international banks were recycling petrodollars (OPEC stash). This led to the international lending/debt boom that eventually caused the crisis of 1982.
This time not only did we have OPEC recycling its stash through the major financial systems, we added the "global savings glut" to the party. This time around Asia had to recycle its massive current account surpluses generated by the usual way they do — suppress their currencies, and put up barriers for Western goods to flow in freely.
"Of course, if Mr. Westerner wants to build a plant and transfer hundreds of millions of technology for us to take at will — well then, come on in. We will continue to enjoy almost 100% free access to your markets while your own policymakers help us by spouting the mantra of ‘free trade.' It's a beautiful thing," says the proud Easterner as he criticizes the extravagance of the West.
(Guess what Mr. Know-it-all Easterner, that double-digit fall in your exports shows that Mr. Westerner is finally getting some religion and starting to consume less and save more; so lighten up — relax.)
But I digress.
Sounds Familiar Doesn't It? Just Replace "Eurodollar Market" with "Derivatives Market"
Now, let's take a look at Mr. George Soros' (Soros the brilliant global macro trader; not the political Soros' who seems such a huge disappointment) excellent summary/analysis of the situation back in the mid-70's that preceded the crisis of 1982 back in 1986, in his book Alchemy of Finance. Please replace the following:
Eurodollar market = OTC derivative market
"The history of central banking is a history of crises followed by institutional reform. It is truly surprising that the lessons of the international debt crisis have still not been learned. The champions of unregulated competition are more vocal, and more influential, than ever. They base their case on the inefficiency of regulators and it must be admitted that they have a point. The participants could not have prevented the international lending boom from getting out of hand, but the monetary authorities could have. Why did they fail to do so?
"There is no clear answer to this question. Central banks were aware of the explosive growth of the Eurodollar market, although they lacked reliable statistics. They recognized their responsibilities as lenders of last resort and mapped out their respective spheres of responsibility as early as 1975, but they did not deem it necessary to regulate the growth of Eurodollar lending. Why? The question requires more thorough historical research than it has received so far. I shall hazard two tentative hypotheses.
"One is that the central banks themselves were influenced by the competitive pressures that affected the commercial banks under their aegis. Had they imposed regulatory restrictions, the banks under their supervision would have lost business to others. Only concerted action by all the central banks could have brought the burgeoning Eurodollar market under control. That would have required institutional reform, and the monetary authorities did not recognize the need for reform. Reform usually occurs after a crisis, not before.
"That is where the second hypothesis comes into play. I contend that the central banks were acting under the influence of a false ideology. It was a time when monetarism was gaining ground among central bankers. Monetarism holds that inflation is a function of money and not credit. If monetarism is valid, the growth of money supply needs to be regulated, not the growth of credit. Accordingly, there was no need to interfere with the Eurodollar market: as long as the central banks regulate their own money supply, the market will regulate itself."
And now, the idea that demand can be stimulated by pumping up money supply in order to force banks to grant more credit as a way of solving a massive credit induced problem seems nonsensical.
But, I digress.