13 January 2010

So how long can this last?


Following on from my last post - the associated question is: How long can the US go on printing money and selling it to others, and what are the alternatives? Basically we are left with two options - hyperinflation driving down the value of the US$, or we beggar the rest of the world through high oil prices (which will only delay the hyperinflation).

But its only 10%

Okay, so the US is running, and probably will run, budget deficits at around 10% of GDP for a few years. Even the best projections, provided by the Obama administration, are predicated on strong economic growth.

Unfortunately that 10% of US GDP is something like US$1.4 (yup, trillion) US$. The problem is - does the rest of the world have USD$1.4 Trillion (bruhaahaahaa) to "lend" to the US, year after year. Global GDP (2008) is estimated to be USD$70 trillion (based on IMF figures, PPP - purchasing power parity).  So, the US alone is asking the rest of the world to lend it 2.5% of Global GDP (excluding US GDP) each year for the next unknown number of years.

Okay, so 2.5% isn't that much (but wait, it's really more like 5%)...

So we'll deduct the GDP of the other major economies that are currently either running deficits or that are on the brink, and therefore do not have much to lend anyone - in fact they are competing for the same theoretical pot of money from which to borrow. Lets just remove Europe as a potential source of lending. Total European Union GDP is estimated at $14.8 trillion (again, IMF and PPP).

So now we've removed something like $30 trillion from the $70 trillion total. Now suddenly our $1.4 trillion needed per year equals approximately 3.4% of Global GDP (again, excluding US and EU GDP).  Country and Country Group economic statistics from the IMF.

Now remember that the United States is competing for lending against all other countries that are running budget deficits, which means all of Europe (for arguments sake). So if the European Union on average is running budget deficits at 5%, or approximately $740 billion each year for the next 5 years (again for arguments sake), total lending from the rest of the world looks even worse.

Now we have a total of something around $2.14 trillion per year. Of our residual $41 trillion in GDP (ex US/EU), we now have a total demand for 5.2% of available GDP.

Looks like trouble coming

So just how long will the world lend (rent) the US (and the EU) 5.2% of their productive output, per year? What happens when they say "We've run out".

Two things:

  1. Governments have to pay the going rate for the money, just like a business would have to - and that means higher interest rates paid on the debt.
  2. Find ways to increase the pool of available money to lend/rent to the developed world (and in this case specifically the US).

For the first, read Inflation. And probably hyperinflation. Because when the world runs out of money to lend/rent, the creation of new money will devalue the existing money. After all, if they Chinese today decided to spend 50% of their US$ reserves, even buying US assets, the price of those assets would skyrocket - (supply and demand and all that...) That's inflation, and it flows through the entire economy. More "money" chasing fewer good equals higher prices for the goods, equals a devaluation of the currency - a de-facto default on value.

The second is where high priced oil comes into play. If the rest of the world does not want to lend to you, and will be inherently unstable if they must "export" money, there any "exported" money will need to find a "safe" home, and that will not be back where it came from. So high oil prices pull money out of the rest of the world (with a higher impact on development prospects for the less developed/poor countries), concentrates that money in the hands of a relatively few countries who are then looking for "safe" places for that money. And now we have a partial solution to how we get the rest of the world to lend/rent money to the US (and the EU).

We beggar the already poor, destroy their chances of a future, while at the same time doing little to actually solve the systemic problems that got us into this mess in the first place.

So just how long can this last?

I truly do not know.

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