U.S. Economy: We Make and Sell Debts

From the “oh, puh-leez” school of economics comes this headline from the recent G7 summit. A week ago the Federal Reserve estimated that domestic US GDP grew at an annual rate of 2.2%; after stripping out the more questionable data it’s more like zero growth. Reminds me of the old Soviet Union: everything was fine until things imploded the next day.

While not out of the woods yet, according to the ministers the global economy is enjoying its strongest sustained expansion in more than 30 years and is in the process of becoming more “balanced.” Sounds pretty promising … except that China has surpassed the US and is now the 2nd largest exporter in the world, even as our trade deficit has gone from $28 to $45 billion. Those G7 ministers must be looking at things standing on their heads … upside down, that is.

Of course you wouldn’t want to rock the G7 boat lest the guy next to you figure it out and start selling first. 2nd place is not where you want to be when that landslide begins. But why worry when the communiqué that the gang of 7 released after they met reinforced their collective belief that “excess volatility and disorderly exchange rates are undesirable for economic growth,” meaning exchange rates ought to reflect economic fundamentals in their country of origin. Or in plain english,

You guys better not sell or you’ll blow this whole scheme for the rest of us. Psst. Japan, we know your monetary base makes no sense and your economy is built on shifting currency sands. If you don’t say anything we won’t either.

And the G7 didn’t say anything. And the game continued as promised.

In fact, Japan’s ultra-low interest rates are fostering a carry trade with other currencies, giving investors a chance to borrow in yen and lend in higher yielding denominations — especially the dollar. The carry trade has depressed the yen’s value, helping Japanese exports (thank you MITI).

Some in Europe complain the weak yen is hurting their competitiveness. Chief critic and German Finance Minister Peer Steinbrueck didn’t attend the G7 meeting in Washington, preferring to go on holiday with his family in Africa. Guess we know what he thinks of the G7.

Of course there is more to the story than national interests and witty personalities. Why, international finance is simply roiling with intrigue; ah, but why waste bytes telling the tale when everything is really run by a cabal of smirking machines? Welcome to the modern era of program trading, said to account for an astounding 80% of daily NYSE volume. If you do the math, that means total daily trading volume in the dollar in fact exceeds actual U.S. GDP by a factor of 3. It’s the machines, you see. The days of sitting behind a desk to make buy and sell decisions was over years ago … but don’t tell anyone lest they realize the system is run by the machines. Still, broke teenagers are getting credit card offers by the score. Does that sound rational? Of course not but someone has to keep this house of cards afloat. And as long as we can push the responsibility off to yet another generation … sorry not my problem. I’m retired. No job, no worries, no problem.

In the 1940’s, 50’s, and 60’s the U.S. economy was divided roughly in half between manufacturing and services. By the 1980’s we were becoming a service economy (translation: a nation of burger flippers). But what the powers-that-be forgot to tell us was that the services we would all soon be providing could be moved to India, Mexico, Poland, or some other low-rent district before we even figured out who to blame. And they were.

The fact is the U.S. is not a manufacturing economy, a service economy, or an information economy. We are actually the world’s premiere finance economy; we make and sell debt, and we are exceedingly good at it so as long as the Chinese are willing to work for $1.00 a day we can do what we do and the game will persist. Although come to think of it, something tells me the Chinese are too smart to occupy the bottom rung on the global ladder for too long. What with 4,000 years of experience and all, it’s not going to be easy to pull the wool over their eyes.

Shh … don’t tell the Chinese, they might want a raise!

Guest Author: Mazy Hedayat