Debt Consumption: How Heavy Exporters Fuel International Debt Crises.
China and Germany are alike in the sense that they are powerhouse exporting, surplus-running economies.
Germany sends it goods across the Eurozone, purchased with borrowed money in Portugal, Italy, Greece and Spain. Likewise, the Chinese ship to the US and abroad in return for notes issued by the US Treasury called dollars.
What arises from these symbiotic relationships are sovereign balance sheets which mirror one another: One countries’ extreme current account trade surplus is another’s deficient. It is basic accounting with a globalizational spin on it, in the fashion that New Deal 2.0 contributor Marshall Auerback has outlined at length previously.
At the most basic level, the combined income of all three sectors of an economy – the domestic private sector (including households and businesses), the government sector, and the foreign sector – must equal its expenditures. Sectors in the economy that are net issuing new financial liabilities are matched by sectors willingly owning new financial assets. This is not only true of the income and expenditure sides of the equation, but also the financing side, which is rarely well-integrated into macro analysis. … Having established this notional balance sheet, there is no reason why any one sector must spend an amount exactly equal to its income. One sector can run a surplus (spend less than its income) so long as another runs a deficit (spends more than its income). Historically, for example, the US private sector has spent less than its income. Another way of expressing this is that the government’s budget deficits have accommodated the private sector’s traditional proclivity to save. When the latter formulation is used, it helps to understand how irrational is the hysteria surrounding government deficits.
So ying and yang.
Now we have these same surplus countries who for decades have lauded their ability to keep savings high, deficits low and prosperity abundant bitching about the consequences of their actions, and those of their trading partners. As Michael Pettis points out:
There seems to be an aggrieved sense on the part of creditors that after providing so much helpful funding to undisciplined debtors, the creditors are going to be left with losses. There is, they claim, something terribly unfair about the whole thing.
To me this whole argument is pretty surreal. Not only have the creditors totally mixed up the causality of the process, and confused discretionary foreign lending with domestic employment policies, but an erosion in the value of the liabilities owed to them is an almost certain consequence of their own continuing domestic policies. It is largely policies in the creditor countries, in other words, that will determine whether or not the value of those obligations must erode in real terms.
The most remarkable conclusion from all of this, is that it will not end. Losing ones creditworthiness, like bankruptcy, happens very slowly, and then all at once. So like Japan, who borrows 10-year money at 1.5%-ish, the US and most other developed sovereigns will always have access to cheap capital, until they dont…
This is the same sort of self-delusion practiced by every gambler who doubles down on his last bet, or by every alcoholic who indulges in a final night on the town before swearing to get on the wagon, but this is self-delusion on a global scale. From Washington to Wall Street, from Beijing to Brussels, people who ought to know better are telling themselves: As long as the United States decides to keep borrowing, someone will always be willing to lend to it – and at dirt-cheap interest rates.
–Michael Pettis: http://mpettis.com/2011/07/current-account-dilemma/