Drunk In A Bankrupt World

[Dover]

Drunk in a bankrupt world
By Chan Akya

An oft-told story about drunks relates the instance of a passer-by asking a muddled and tipsy wanderer what he is looking for under a streetlight, only to be told that the inebriate lost some keys in the nearby bush but is looking under the light because, well, there is light around.

In much the same way, politicians and central bankers are stumbling around aimlessly blaming any convenient target for the problems faced by their constituents. They need some help in connecting the dots; here then is an attempt towards the objective. In this article, I will examine the common thread running between five different stories that surfaced this week:

Mitt Romney's pledge to save Michigan's auto industry, that apparently won him the Republican nomination from the state.
Mounting credit losses and attendant capital raising by US banks.
The World Bank's most recent acknowledgment of the corruption that plagues most of its projects, this time involving healthcare projects in India.
China's further tightening of lending conditions at its commercial banks even as it announces explicit price curbs on key food and other products.
The launch in India of the world's cheapest car.

On the face of it, there is not much linking these stories. The state of Michigan, for example, plays host to America's once-mighty automotive industry. That's not the only reason it is in the news these days - the state also has the dubious distinction of being in the top five most delinquent states for personal finance (you know, credit card debt repayment, mortgage repayment and all that sort of thing).

Things are so bad that some economist wags are calling the state Michi-Gone: yes, humor is among the various talents that economists do not possess. It is easy to make the link between the declines of the auto industry and the personal wealth of the state's citizens, but that's not the full story.

Add to this the question of why the auto companies squandered their hard-won prosperity from the nineties (Of black swans and greedy oilmen, Asia Times Online, January 5, 2008) and a more complex picture emerges. With a strong US dollar that was helped along by billions in so-called safe-haven flows following the Asian financial crisis, America simply had too much money, which is usually the first condition for capital misallocation. That is what led banks and smaller financial companies to lend willy-nilly for mortgages, credit cards and the like essentially to people chasing the American dream - ie a house of your own with a two-car garage and excessive cholesterol intake.

These inflows kept the US dollar strong thereby making Americans less worried about the steady rise in oil prices and a concomitant feed through into inflation. This house of cards could have fallen long back but for the deflationary impact of China adding manufacturing capacity in every conceivable industry, which helped to keep prices low in the US. Asians also had the good habit of saving more than they spent, and also shipping the piggy banks to New York for investment in anything that their honest Wall Street advisers told them to buy (The robbery of the century) Asia Times Online, July 14, 2007.)...>

http://www.atimes.com/atimes/Global_Economy/JA19Dj02.html

[NMDemDist2]

1. excellent article, thanks n/t