There is a Tamil sign we used to see in shops: கடன் உறவைக் கெடுக்கும் (debt destroys relationships). It means “Please pay for your goods, don’t ask us to postpone your payment”. That quaint sign of course is against modern practice where we are encouraged to charge it up!
The entire global trading system, in fact much of the global economy, now runs on the “charge it up” principle. Countries are encouraged to become “prosperous” by promoting consumption without local production. It does feel prosperous because we got all these goods. Here is the problem: global free trade is fundamentally incompatible with ever-expanding global debt (as measured by global debt to GDP ratio). The old Tamil saw is right after all - debt does destroy relationships, and that’s true in the village and true across nations.
We have erected the entire global economic edifice on “we can pay for it later” and when a crisis erupts “we can keep kicking the can down the road”. The fatal conceit is that this can go on indefinitely. This is the conceit global monetary authorities have been on. There are two fundamental reasons it will end: rising trade frictions as countries adopt “beggar thy neighbour” policies.+++(5)+++ i.e, currency suppression to promote exports - China, Germany, Japan all do it - is one reason. This is based on the mercantalist fallacy “we only sell”.+++(5)+++ If a country only exports and does not import, eventually it will come to own all assets in other countries.
Look at China- India trade. China has to keep looking for investments in India to deploy its surplus and as a mirror image India has to sell itself in bits and pieces.+++(5)+++ China has achieved these surpluses by suppressing domestic consumption and focusing on exports. This system is breaking down because importing nations can no longer afford more debt based “prosperity”. Unemployment and underemployment are serious in importing nations.
To restore harmony in international relations and to preserve free global trade, the system has to get back to balance. To achieve that balance in global trade, we need something like the gold standard to settle inter-country trade. Paying with debt is not a good substitute. If that thesis is correct, we can expect a far more chaotic global economy in the decade ahead, with trade wars (which I sincerely hope won’t become real wars), extreme currency fluctuations and so on, as policy makers try to hold this rickety edifice together. Be prepared! 🙏
No peace with debt
(Source: https://threader.app/thread/1264553416191365122)
Thought experiment: let’s say one company invents a miracle machine (the replicator from StarTrek!) that produces every product we can imagine at near zero cost. They keep the machine a closely guarded secret and flood the global market with products at low but nonzero prices.
Since their prices for every product is lower than anyone else, they end up gaining more and more market share. They themselves, thanks to their miracle machine, buy nothing from anyone. Can you see the end result? They end up holding huge financial claims on the world. Globalization has really come down to the “haves” holding huge financial claims on the “have nots” - Germany’s financial claims on Italy, China’s financial claims on Sri Lanka and so on. Global monetary policy has become an instrument of bondage for the “lesser” nations.+++(5)+++ This process has reached an absurd extreme.
The reason it cannot go on much further is that the US itself, the prime mover of globalization, has become heavily indebted in order to supply the “money” (USD) that global trade needs. And more than trade, financial gambling too. Let’s get back to our miracle machine. China, Germany, Japan, Taiwan, South Korea … have the goods the world wants but cannot really pay for except with debt.+++(5)+++ These countries, for all their prowess, cannot ever “collect” on that debt because collecting on it means imports!+++(5)+++ There is no realistic time line in which a Sri Lanka can export $60 billion worth of goods that China and Germany would want , to repay their $60 billion debt. The issue goes to Sri Lanka not having that “miracle machine” i.e, the capability to produce the advanced goods.
Debt forgiveness
Countries like Italy and Greece face the same problem but since they are in the EU, Germany can basically “mutualize” their debt which is the same as Germany forgiving Italian and Greek debt. That’s the only way the EU can survive. The world needs mass debt relief now. This process also has to happen within countries. Poorer segments of society have to get their debts wiped out. There is no durable economic recovery until this debt overhang issue is addressed. It means that creditor nations and creditor classes have to accept haircuts. Since there is no way Italy or Greece or Sri Lanka can ever repay their debts (they don’t have goods to offer that their creditor nations want to buy), the hair cuts are merely a recognition of the loss that the creditor nations have already suffered.+++(5)+++
Finally, the “miracle machine” i.e, the productive prowess, needs to be broadly shared and there is no point for a Germany or Japan or China to hoard the “miracle machine” because they cannot really collect the debts that arise from their exports without equivalent imports.+++(5)+++ By hoarding their productive prowess they simply end up hoarding debt from other nations. Spiritual economics is about realising the futility of putting a large number of people into your debt. Neither the creditor not the debtor is at peace.This realization must happen.
Debt is not affordability
(Source: https://threader. app/thread/1391569609094959105)
One major theme in “Trade Wars are Class Wars” is how financial flows determine trade flows. Free trade doctrine asserts efficiency/comparative advantage determine trade trade flows. That’s only true when buyers can afford a product. Debt does not mean affordability!+++(5)+++
From the book:
. . trade flows were determined by financial flows. The financial innovations that led to massive British capital outflows to Latin America in the early 1820s . . were directly connected to Britain’s massive trade surpluses with Latin America during the same period. “These trade relations cannot be explained by analyses of British manufacturing efficiency or the comparative advantages of Latin American producers.
This is a very critical point for policy makers.
Fragility
Source: TW
The Credit Suisse crisis demonstrates yet again the extreme fragility of the global financial system, caused by decades of central bank madness, with endless QE distorting financial markets & the real economy beyond recognition, causing massive inequality & other social ills. This hyper-financialized regime of debt driven “growth” cannot be sustained. The problem today is that global policy makers, particularly central bankers in the developed world, know no other play book than yet more QE and curing extreme debt with yet more debt and bailouts.
Inflation is the inevitable consequence, and as long as inflation was confined to asset markets (stocks, bonds, real estate) it all seemed to work. We have now reached a point where the real economic distortions of decades of ultra-easy money have led to loss of productivity. At this point, repeating their old playbook of yet more QE & endless bailouts can only lead to an hyper-inflationary end-game.
Back to basics
That is why I focus on basics: grow more food, build lower cost housing, affordable education & healthcare & importantly, learn to live well on less. Back to Basics: that summarizes my approach on how to cope with the impending economic dislocations central bankers have all but ensured for the world. I know from experience back to basics helps us be happier and more rooted as well, so this approach is good on its own. 🙏