The biggest transfer of wealth in history
By
Bill Bonner Jul 11, 2008
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This week began with alarm bells. First Bridgewater Associates broke the glass and pulled the handle; it said the conflagration in the credit markets might lead to losses four times higher than previous estimates – at $1.6trn. A lot of money, even for someone who lives in London.
Bridgewater helpfully pointed out that this was just the beginning; the world would lose an additional $12trn in foregone credit. When the going is good, each ounce of a bank’s share capital grows into a pound of credit available to borrowers. But when the cycle turns, the shrinkage takes your breath away. Remove a dollar from a bank’s balance sheet and you wipe out a ten-spot of credit.
Bad news for people in Britain and America who are accustomed to living off credit. Bad news for their economies too. To give you an idea of the scale of a $12trn problem, the entire UK economy generates only $2.8trn of output annually. The US economy – at $13.8trn – is only slightly bigger than the total anticipated damage.
When the alarms quietened and the flames died down, hopeful analysts sifted the ruins and wondered where the City and Wall Street might find the resources to restock their shelves. Suddenly, all heads rocked towards the East. Visions of myrrh and incense danced before their greedy eyes. Enriched by black gold or by commerce on the trade routes between Hong Kong and Long Beach, these princes of modern finance have trillions, the feeling went. Surely they will come to the aid of those who made them rich? The gist of the following reflection is this: no, they won’t. Just because people are rich doesn’t mean they are stupid.
Outside the Bank of England and the US Fed lies some $5.3trn in central bank reserves. In foreign government pension reserves and other accounts is another $6.1trn. Add $3trn more now in the hands of sovereign wealth funds (SWFs). The IMF says these SWFs will grow to $12trn within four years. Morgan Stanley estimates a $17.5trn pot by 2017, enough to buy every public company in Britain and America combined.
Few people bother to ask where they got all that money. We will. It is the fruit of a monumental hornswoggle. “It is the biggest transfer of wealth in history,” says T. Boone Pickens, speaking of the oil trade. Americans import 3.6 billion barrels of oil a year. In 2003, the tab for all that goo was only about $70bn. At today’s oil price, it is pushing half a trillion. A quarter of oil’s price increase since 2003 is down to the falling dollar. What about the other 75%? That too, is probably largely a feature of a slippery dollar. For the last 100 years, the oil price has greased along – more or less – with US money supply growth. As M3 increased, so did the price of oil.
Currently, the money supply – as measured by M3 – is increasing at an annual rate of about 18%. Oil is going up – on a ten-year moving average basis – about 23% per year. Looked at another way, from 1974 to the present, the price of oil has gone up a bit more than 14 times. The US money supply, meanwhile, has gone up a bit more than 11 times.
This is one of the funniest and most perverse scenes in modern finance. In effect, the world’s most sophisticated capitalists are also the dumbest when it comes to money. America and Britain spent too much money. Now, they owe more money to more people than any nations ever did before. And now, the US central bank inflates in order to try to rescue its errant banks, reckless spenders and condo speculators.
But in the global economy, the easy money won’t stay put. Instead, it seeps over to oil sheiks in the Near East to pay for petrol... or over to the sweatshop operators in the Far East to pay for electronic gadgets and designer T-shirts. It doesn’t stimulate the US economy; it stimulates the foreigners’ economies and raises prices for everyone. Unfortunately, while the foreigners can keep up with rising prices – incomes in India are up 148% since 2001 – the Anglo-Saxons’ wages are stagnant. Americans haven’t had a real wage increase in 40 years.
And now the lynchpins of leveraged finance are praying that the cash they spent on imports will come back to them. And it will. But it comes back like a young man who got rich in the colonies... with better clothes and a sniffy air. It left a servant; it comes back a master, buying up valuable assets and expecting the indigenes of Wall and Threadneedle streets to shine its shoes. Foreign purchases of US assets rose 90% last year. Foreigners are bidding for America’s leading brewery, Britain’s stock exchange, infrastructure projects and technology companies. An SWF from the Gulf bought the Empire State Building in New York. And the balance sheet of US Fed shows $2.3trn of US treasury debt held in custody for foreign central banks.
The harder the Fed fights the correction... the more money and credit it puts out. Prices of oil and imports rise... and more money goes into foreign reserves and sovereign wealth funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being nationalised… by other nations.
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