Monday, July 6, 2015

Countries can save without causing financial disasters

Germany and China continue to demand the right to export more than they import. How do they do that? Obviously there must be more money coming in than going out. This has to be balanced by money going out that does not have anything coming back immediately, which is foreign investment in various forms.

The Chinese used to do this by buying US bonds. Then when the US decided to print money to buy bonds (and thus keep the value of bonds low), the Chinese realized they'd lost control of their money. We now see a lot more real investment in external real world assets. They still don't ultimately control that. Let's hope they never try to.

The Germans have a multinational currency. So all they need to do is find a sucker in the EU to lend it to. This gets harder and harder, so they've been lending to increasingly poor credit risks. Then when it blows up in their face they claim that the suckers must go to the equivalent of debtor prison.

Repeatedly down the years we hear China and Germany claim the moral high ground: "Why doesn't everyone live within their means and export more than they import, like us". When people point out that this is totally moronic, they go quiet for a while. But they don't change what their doing. And then they say it again.

Countries can, and should, prepare for the future, but they can't do it by saving money as ordinary folk do. They need to actually acquire real world stuff that will make the future safer. A good choice is to build energy creation systems that are relatively expensive to build (capital cost), but then have relatively low running cost. If you have cheap energy you can then make other stuff. Another thing to do is stockpile raw materials that are not easily available within your borders, but that can go wrong if future production switches away from that particular material.