Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

'When the World is Free …'

By James Cumes - posted Thursday, 8 March 2007


This is not a phenomenon that affects only, let us say, Japan on the borrowing side or, let us say, the United States on the lending side. Switzerland is a financial centre where borrowing costs may be low at, say, around 2 per cent and New Zealand is a country with a large trade deficit in which lending rates are relatively high.

The carry trade might therefore continue to flourish to the “benefit” - as it is seen at least in the short term - of both the country in which the trader borrows and the country in which he lends; and it might help to “stabilise” - again, at least in the short term - the world economy and the global financial “system”: whose breakdown, if it were to occur, would cause such loss and suffering to so many people, presumably on every continent and in every region.

So we come back to the curious discrimination, at the Group of Seven Finance Ministers’ Meeting, shown between China on the one hand and Japan on the other. It is Japan that has a large and, so far as we can gather, a dominant role in the carry trade; and it is that trade that must be protected even though it introduces the most extraordinary distortions in the global financial “system”.

Advertisement

What should be one of the world’s strongest currencies is weakened by yen being sold for, let us say, American, New Zealand or Australian dollars which are thereby kept at a level that they could not otherwise sustain.

Equally, there is a distorting impact on interest rates. If Fed Chairman Bernanke were to reduce the Fed rate, the inflow of funds to cover the huge monthly trade gap would possibly be reduced. The carry trade does not supply the whole of this inflow but it has been - increasingly - supplying a sufficient proportion for it to deserve and to have won the approval of the American Treasury, the Fed and other American financial institutions. It thus achieves a “respectability” that in other circumstances, might not be warranted.

Overriding all this is the distortion that the current global financial situation inflicts on liquidity, credit, interest rates and asset-price and consumer-price inflation. The purpose that central banks are supposed to serve in disciplining inflationary trends is almost completely lost.

Though they may raise interest rates, this has little or no impact on inflationary pressures - as it has characteristically been imagined to do - because liquidity has been vastly expanding and credit has been generously available on easy terms despite the local cost of consumer or investment money. Indeed the high local cost of funds only serves to make the profits of those who supply the credit and provide the liquidity higher than ever.

So the trade and payments deficits of New Zealand, for example, reach unprecedented levels as a percentage of GNP but the value of the NZ dollar is maintained or even enhanced and the deficit is easily financed through the inflow of funds borrowed in low-interest-rate economies.

Much the same phenomenon may mark other economies such as Australia and the United Kingdom. In these economies, the central bank may raise - and indeed it has raised - interest rates and so damp down the housing boom but then the higher interest rates attract those with money borrowed elsewhere. As a result, they may breathe new life into the housing and other asset markets so as to sustain or intensify the boom or slow down its decline.

Advertisement

All of these effects may be seen, with justification, to constitute a happy outcome, if the prospect were otherwise for a catastrophic economic and financial collapse in the short term. However, it is difficult to see that it does more than postpone such a catastrophic collapse in a slightly longer, medium or long term, unless decisive action is taken to remedy the fundamental disequilibria in national, regional and global economic and financial situations.

So far as we can gather, no such action is being taken or contemplated. Rather have the Group of Seven Finance Ministers’ meeting and subsequent events suggested that there has been collaboration in manipulating capital flows, interest-rate impacts and divergences, and other factors, so as to preserve the American and other economies from the catastrophic collapse that would otherwise be the outcome of their economic and financial policies.

That does not mean that there will not be a catastrophic collapse, only that it might be postponed to a date that cannot easily be predicted. On the basis that an economic depression has historically tended to be proportionate to the intensity of the preceding boom, the longer-running distortions and the ever more massive sums involved in global financial undertakings must reasonably be presumed to make the catastrophe, when it finally does arrive, even greater, more devastating and entailing more widespread suffering than ever.

Will such a collapse treat more or less equally all participants in the global economy? On this, it is impossible to be precise. There is perhaps some reason to conjecture that some countries such as China might have a greater awareness of the reality of what is happening; they might already have been taking some precautions and the nature of their government - this would seem to apply also to Russia - can more readily than some others be adapted to the situation of economic and financial crisis that seems now to be foreshadowed.

If so, this could mean that, unlike the Great Depression of the 1930s, the depression that confronts us now could affect countries unequally and that the shifts in economic, social, political and strategic power that have already occurred in the last three to four decades could be dramatically intensified and from the economic and financial collapse there could emerge a fundamentally new balance of global power - strategic as well as economic.

  1. Pages:
  2. 1
  3. 2
  4. Page 3
  5. All

America's Suicidal Statecraft is available most readily through Amazon, at $26.99 a copy.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

3 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

Other articles by this Author

All articles by James Cumes

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of James Cumes
Article Tools
Comment 3 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy