By: Ian Welsh
You may have noticed the rather frigid response to requests that the rest of the world help with the bailout. European leaders coldly said no, so did Chinese, so did, well, pretty much everyone. And China instructed its banks to not lend to American banks.
You might be wondering why. Let’s start with the history: basically the US spent the last seven and a half years borrowing money from the rest of the world and spent it on tax cuts for your rich, a war that most of the world didn’t agree with (that’s Iraq) and on consumption. The money inflow was extreme, at one point in 2005 one survey showed it as being more than the total interest on all the money in the world (ie. all the legal money, plus drug money). Everyone warned the US, including the IMF, but the US just went on its merry way with a war no one wanted and policies clearly aimed at making its rich even richer and impoverishing its middle class.
Since, however, it was buying Chinese goods and since that meant that China was industrializing by giving the US money in exchange for manufacturing jobs, the Chinese were willing to keep the subsidies going. To a lesser extent, so were the Japanese and Koreans. And while most everyone else wasn’t that thrilled, the idea of the US having an economic collapse and taking the rest of the world down with them didn’t seem too hot (although Stirling was arguing at the time that the Europeans should pull the plug anyway, because the costs were larger than they appeared, and well, if they didn’t, what’s happening now would happen.)
But anyway, no one pulled the plug and enough nations indulged America’s nasty credit habit that it was able to keep on keeping on, to the point where the US savings rate spent a fair bit of time actually negative. The metaphor I like to use is a junkie and his fixers. Except that in this case the junkie was the most powerful nation in the world with the most important currency. Any other customer (like say Argentina) would have been cut off long ago. “Sorry bud, no cash, no crack. Unless you’d like to sell us your wife strategic industries? No?”
So, long story short, the rest of the world doesn’t feel much if any sympathy for the US about all this. You borrowed the money, you promised to pay it back, and now it looks like the stuff you gave everyone in exchange for all that money is mostly garbage, worth cents on the dollar. Your IOUs, in other words, are no good. Everyone knows they’re getting stiffed, they’re just trying to figure out how much they’re getting stiffed for. Even if you’re holding greenbacks, everyone knows that the currency is going to crash even further and also get eaten up by inflation.
That’s why when the bailout came around it included a provisions for bailing out foreign banks holding toxic American waste that Americans sold so they could keep having their splendid little war, giving money to the rich, and running up a housing bubble while consuming cheap and lousy Chinese consumer goods. Those countries were, well, pissed. Now, in truth, I don’t think they have a lot of cause to be pissed, they had to know that they were going to get stiffed – you really shouldn’t lend money to people you know can’t pay it back, even if they do promise that they’ll crash the world economy if you don’t. But even if you expect you aren’t getting paid back, when the day comes that you’ve got to write off hundreds of billions of dollars, you’re still not pleased. I’m sure ordinary Americans can understand that, given that they’re being asked to eat that loss for Wall Street.
Further to this, from a foreigners point of view, the US response is still crazy. You obviously can’t afford the war in Iraq, for example. Why aren’t you ending it? Now. Not “sometime”, but NOW. Forget the BS about how long it would take to pull out, if you want to do it fast, you can do it fast. And you’re spending more money on your military than the rest of the world combined. Back when you used to do things with that military that the rest of the world sort of liked, like say dealing with Bosnia, people were willing to help you keep it. But now that you’ve proved you can’t be trusted with it, everyone’s wondering why they should help pay for it. You don’t need that big a military to defend yourself, you only need it if you want to run around and knock over some more countries.
Plus, of course, outsiders are noticing that the “bailout” bill is really just a huge transfer from taxpayers to the rich, and that even your own economists are saying it won’t actually fix the problem. So why should they pour more money down the drain when it won’t do any good?
Especially when it’ll do harm. Every dollar spent on a fake bailout will go to oil prices. Give it to ordinary people and they’ll buy gasoline and heating oil; give it to rich people and they’ll drive the market back up. Also, printing 700 billion (0r 2 trillion, or whatever number Paulson decides is enough cash for his buddies) will cause generalized inflation and push down the value of the dollar even more, thus reducing the value of foreign dollar holdings even more.
And the one thing the US really needs to do, which is break the back of the oil market, with the help of other nations, it isn’t even considering doing. No one is saying “let’s spend 20 billion buying up all the old cars on the market and junking them.” No one is saying “lets get businesses to have their workers work nine 9 hour days every two weeks and save a huge amount of commuting”. No one is saying “let’s enforce a 55 mile an hour speed limit on every street that has a faster one.” No one is saying “lets take a hundred billion and start refitting as many buildings in America so they don’t use heating oil, and in fact use almost no oil.”
Without doing those things at the same time as a bailout, the bailout will go to oil prices. And that kills everyone, not just Americans, but every nation that consumes oil.
And all of this is before you get to the fact that bailing yourself out with imaginary money means that the trillions of dollars sitting out there, held by foreigners, means they can’t walk in and buy up the best parts of America. What, you don’t want them to? Well what are they supposed to do with all that money you gave them in exchange for your war, rich people and a housing bubble? What does America have that they can spend that money on get something for it?
The answer, actually, is that they might as well just dump it all into the oil market, since they aren’t going to be allowed to buy anything else with it. What will that do? I’m sure you know the answer by now.
So no, foreigners aren’t real pleased right now, and they aren’t buying into Paulson’s money grab (or anyone else’s.) For them to do so, they need to know that the US is going to fix problems that bother everyone. They might be willing to swallow hard and admit that those trillions are essentially very expensive wallpaper, but if they’re going to do that then they also want to know that something is really being fixed. Since none of the solutions Congress is considering will do more than push the problem back a bit, while denying foreigners the ability to spend their money on the American assets they want, there’s no reason for them to sign on.
So the US is on its own until it convinces other countries that it has a real plan, that hopefully will actually do something to take their interests into account.