I like old film, they offer a bit of instruction that sticks with you. Of course this post is far more about the whole of Europe and the rest of the world. And yes, the pain in Spain will stay mainly on the plain, roughly about Madrid. Let us recall one of the basic economic points that so many pundits fail to understand and yet one screen writer understood all too well. The year is 1976, Gerald Ford has just lost to Grinning Jimmy Carter and the film that sweeps the nation is Network, a satire that predicts the internet, reality shows, and teaches us a bit about economics. SWo go to You-Tube and find the four or five minute screen where Arthur Jensen, CEO of CCA has called Howard Beale to account for his last tirade against the merger of CCA and some other international consortium that represents the Arabs. Jensen delivers one of the best explanations of current accounts I have ever heard. “The Arabs have taken billions of dollars out of the US and now they must put them back!” Yep, got to balance those current accounts.
So what is a current account? When one imports goods and services into one’s country one normally pays, assuming ones country’s credit is good, with the currency one has at hand. If I import French wine then I could pay with American dollars or with Euros. Note that the foreign exchange rates usually favor the stronger currency and that someone will need to pay the fee to convert dollars into euros and back again. On the other hand some party in France may wish to buy some good or service from us, so we actually have established two different accounts, one for imports and one for exports. It would be nice in real life if the import and export balances were approximately equal. But what happens if one country import too much from one trading partner and fails to sell enough to its other trading partners? There is an imbalance and it must be rectified. For years we ran a surplus of imports from China and yet exported very little to that country. What does China do with all those American dollars, buy treasuries? Actually to own a lot of US Treasuries. But if China can’t spend the dollars in the US buying our exports, the our currency is worth less to them. On the other hand, if they peg their currency to ours they manage to sell more cheaply to us because they have artificially manipulated the currency exchange. Of course the Dollar is the worlds premiere trae currency so China can take her billions of Dollars and pay for raw materials and other goods and services because the dollar is accepted around the world, like American Express. Are you with me so far?
Now one of the problems that faces the world is that there is some seven trillion US Dollars used in the carry trade. It this example, if one borrows a substantial amount of money for investment purposes (we will get to using the carry trade for speculation later), then it doesn’t matter if you are in Greece, France, India, or where ever, the loan is denominated in dollars and must be paid back in dollars. You can’t satisfy the loan by paying Euros or any other currency, it must be dollars. Now if you borrow in dollars you are shorting the dollar. That is, you believe that the dollar is weak and may go down in value. But what happens if it rises in value? Ah, you are in a world of hurt because it will cost you more in your own currency to buy the dollars to pay back the loan. And remember that there are always foreign exchange fees to be paid, always. Just as any borrower benefits when inflation rises to four or more percent and thus makes the currency cheaper based of the fact that ones salary tends to rise in times of inflation while ones liabilities stay the same and thus become a smaller piece of the expense pie, a falling currency allows the same type of action to happen. With me so far?
But when a currency gains in strength then there is the devil to pay if one has contracted loans in that currency because the price of paying the interest and principle becomes more expensive. It works the same way the deflation does. Your liability stays the same rate or dollar amount but you earn less and thus your liability expense, which is now a larger percentage of your expenses takes more effort to repay. And that seven trillion worth of dollars in the carry trade is more than the combined GDPs of Italy, France, Spain, Ireland, Portugal, and Greece. Little wonder that a mere two hundred and forty billion euros worth of debt is of such dubious concern in the long run. But this would be bad enough in the foreign exchange wars if it were not for Putin’s plan that Russia should go back on a gold standard. Ah, this is a biggie in the world of problems.
Back in the days of gold standards, when more every country who wished to be considered seriously in the world of global economics, there was a gold, and to a lessor extent, as the ultimate exchange medium. When you ran a current account too large, your government was obligated to send the amount of precious metal to the other country. This is why ships were often contracted to carry gold bullion from one country to another. Sometimes this was done by military navel vessel. Then came the gold and silver bullion depositories where the bullion was moved from one cage to another, each cage represented a particular country. This meant that one no longer needed to physically send the gold from port to port. As long as everyone was honest and kept good records the accounts were always balanced. It is only fiat currency, better known as government promises, that allows the extension of credit to the point where credit can be leverages by one hundred, a thousand, a million percent. If you open a checking account with a thousand dollars and you only use three hundred dollars at any one time, I can lend out seven hundred dollars of your money and make money off your money in the process. On the other hand if this month you use five hundred dollars out of your account then I may have a problem paying your checks while lending your money. You see, credit spends just like real money. So if there is any hyperinflation you may say that it is due to an excess in credit extension.
Now if Russia goes on the gold standard then it will not be able to use a great deal of credit in the future, for the money must be backed by the presence of gold bullion. Would any of you ever allow your bar of gold bullion to be used ad a promissory note for ten bards o gold? So how does this affect the Russian economic community? Good question, any takers? If you can’t spend your way to wealth then you better have some very detailed plans. And this is the very problem for Europe. The socialist mindset has taken control of the economy and people cannot tell who is and who isn’t the enemy. So we can see that we have some very severe problems that cannot be solved in the usual manner of throwing money at them. What plays out is of paramount importance.
Now let us consider the problem of oil. My god, there are idiots out there trying to teach their grandmothers to suck eggs and grandma ain’t having anything to do with it. Because we were doing so much exploration and well development for shale oil, tar sands, shale gas, ans other exoitc streams of energy we forgot that a GDP runs on oil, but only when it is robust. I don’t care about Willy Nelson’s bio-diesel, don’t care about ethanol, or solar power, or anything else. What I care about is usage. A nations economy runs on oil, always will until the oil is pretty much gone. Right now China has about a twenty percent cut in consumption of oil use. China uses one hell of a lot of oil. One hundred dollar barrel of oil tomorrow? Surely you’re an idiot. World demand has been greatly reduced because of the recessions/depressions. It is a pure and simple matter. The numbers don’t lie. We are awash in a sea of oil that will not diminish until June or July. Then we may expect to see Russia cut its oil production. And when it comes to oil production, let me tell you, it is not a cakewalk. There should be enough supply to keep prices low, in the fifties and one or two breaks in the market as everyone races to the bottom.
If there is any more evidence of a depression sliding into the various economies, you will not get a better example of on. Expect multiple problems and oddly enough, multiple solutions, That is the beauty, the future is not so narrowly defined. Well have fun with this post, I am sure that you can argue against it, for whatever it’s worth. Remember when the preacher came to No Name City? Will you go to heaven or go to hell? Here it is. Come the end and it won’t be pretty. Here it is, I said here it is.