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Wednesday, April 20, 2011

The emperor has no money

Have you heard the one about the 'emperor having no money'. It is a variant on the theme of 'the emperor with no clothes'. It highlights the moral relativism or 'monetary rationalism' that goes blistfully unawares in the largest economies in the world. Consider these facts:
1. Most of the world's financial resources are denominated in USD, EUR or Yen
2. Most of the world's wealthy people are located in those countries as well.
Monetary authorities in these countries need not draw attention to their economic malaise if they all sabotage their economies in the same stride. i.e. The Japanese have a bloating public debt of 220% of GDP, Europe has the indulgent southern and northern states to support, whilst the US has its twin deficits. Now, these countries account for so much of the global wealth base, that if any large public or private holder of these cuurencies decided to do anything, what difference would it make? The 'rest of the world' is too small to account for significance.
The implication is that currencies like the Australian, Canadian dollars, South African Rand, etc can become priced very high in USD terms, and these currencies will remain in-sync, and thus relatively attractive by virtue of the size of these economies. None of the monetary authorities will question the strength of these commodity currencies.
So what is the next step? The problem is that these 'strong' currencies will be forced to sabotage their economies too so that their currencies weaken. After all they have to remain competitive against the major currencies....otherwise they will simply become miners of commodities, which employs only 3-5% of any labour force directly. Clearly they are not going to allow that. So expect commodity producers to sabotage their economies, i.e. Expect them to increase taxes and welfare, so that a greater piece of the cake goes into unproductive welfare. Expect them to keep interest rates artificially low to drive their currencies down.
This is where perceptions become more important than facts. That is why the 'emperor has no clothes'. People care not about the long as the illusion of comparative advantage or the illusion of wealth is preserved. In the meantime, the global wealth creating potential of the globe will be sabotaged. Collectivists around the world can rejoice....they are extending tyranny to the strongest nations in the world. The good will be forced to discard financial discipline. Morality or fiscal responsibility will become irresponsible or impractical by this standard of value. Welcome to the contemporary system of public administration. It was always there, you just didn't see where it was taking you. It gets worse...are you going to wait for worse?
Andrew Sheldon

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