A Reversal of Misfortunes
It’s often the case that the conventional wisdom is turned on its ear before the ink has had a chance to dry on the page. So might be the case as the economies of the world endure a reordering the likes of which our planet has not experienced in generations. What seemingly emenated from the rotten core of American cowboy capitalism has washed across the Atlantic and Pacific and is now gnawing away at the foundations of European and Asian markets like a hurricane levelling the dunes, and the dunes on their shorelines are turning out to be far less sturdy than those protecting America.
The original narrative put forth by the liberal pundits and the European media was one of American over-consumptions, greed, and disregard. It was the end of America’s dominance. We were getting our comeuppance. The political elite in Europe clamored to be quoted and on-record in their prescience regarding the inevitable American meltdown:
European leaders have lined up to hail the triumph of welfare over Wall Street. “The idea that markets are always right was a mad idea,” declared the French president, Nicolas Sarkozy. America’s laissez-faire ideology, as practised during the subprime crisis, “was as simplistic as it was dangerous”, chipped in Peer Steinbrück, the German finance minister. He added that America would lose its role as “financial superpower”. The Italian finance minister, Giulio Tremonti, claimed vindication for a best-selling book that he wrote earlier this year about the dangers of globalisation.
The popular consensus in Europe was that they knew, all along, that the excesses of American capitalism were doomed to failure, and that the resulting catastrophe would vindicate their highly-regulated socialist market philosophy. As the subprime crisis began to unravel in America, the Europeans were all-too-eager to point fingers at the cowboy Capitalism in America as the source of this unrest.
And then Europe unraveled.
Iceland is bankrupt. They are now waiting, on pins and needles, for a bailout from the International Monetary Fund. They are busily negotiating with the Russians, the concessions involved can only be eerily pondered. Speaking or Russia, with oil prices getting a 50% haircut in a matter of weeks and the Russian stock market crashing, things aren’t looking too good over there, either:
The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
The nations of Europe have so much bad debt spread around the world that it dwarfs America’s subprime crisis. As reported today by Ambrose Evans-Pritchard,
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
You read that right. Austria has bad debt out there in the emerging markets (small, risky economies like Latvia) in an amount equal to 85% of the Austrian GDP. That is a staggering amount. American exposure to bad debt in emerging markets is 4%. As another example, let’s look at China. It is a much larger economy that Iceland, but it is still an emerging market. While the US Dow Jones Industrial Average has tumbled about 37% over the course of 2008, the Chinese market has suffered a 62% decline during that same time. India to the tune of about 56%.
So, while the Americans were irresponsible, the Europeans face an even graver threat to their national balance sheets due to even more irresponsible lending. The American government was practically co-signing millions of mortgages to low-income familes who clearly couldn’t afford to pay back the loans. The Europeans, on the other hand, were sending money overseas, to people in other countries who can’t afford to pay back the loans. If anything, bad loans within your own country are better than bad loans sent off to Estonia or El Salvador. The American government and it’s citizens stand a decent chance of recouping those losses as home values settle and begin to rise again, but foreign debt is not so easy. It might never come back.
As the crisis unfolds, another funny thing is happening. The American dollar, much derided over the past years for it’s weakness, is now relatively strong. In fact, it has gotten very strong over the past few weeks, so much so that it has been a large part of the reason oil prices have been plummeting. As foreign currencies start looking real dicey in comparison to the US Dollar, it has risen dramatically. It’s certainly not guaranteed that the Dollar will stay strong, in fact it will most likely weaken in the near-term, but it’s resiliency in the face of global turmoil is all the more important in comparison to the weak Euro.
A strong dollar. Cheap oil. Russia and OPEC on the ropes and running out of cash. Europe strangling itself with bad foreign debt. Global stock markets crashing. While the US is flirting with a depression, or at least a recession, the rest of the world is getting very ill, indeed. Far from this being the end of the line for the capitalist cowboys in America, this might be where we start picking off struggling foreign firms at rockbottom prices, and chuckling to ourselves as two-bit dictators and the OPEC countries feel the grind. No matter who “started it”, the US is uniquely positioned to profit from it. When this all shakes out, someone will be laughing all the way to the bank.
It’s times like these that separate the strong from the weak. There has been a lot of strong talk about weak America for a long time, and it’s about to be the time where we start to see who can do more than just talk the talk.