Gary North: Addicts and pushers

verfasst von Miesespeter, 08.01.2004, 20:13

-->ADDICTS AND PUSHERS

Most residents in the United States are addicts. They
are addicted to debt.

This year, the U.S. economy is facing a $500 billion
balance of payments deficit with the rest of the world, but
mainly with East Asia. This annual deficit keeps getting
larger.

The government of the United States is also an addict.
It will run about a $500 billion deficit this fiscal year,
and that doesn't count Social Security/Medicare, whose
"trust funds'" surplus revenues are used to reduce the
official debt. This deficit keeps getting larger.

To supply the drug of choice -- dollars -- the loan
pushers in the international capital markets dig into their
wallets and hand out the money. Why? Because they expect
the addicts to pay back dollars or sell them their capital
assets. The pushers who want payback in the form of money
buy bonds. The pushers who want payback in terms of
ownership buy stocks.

To supply the drug of choice -- dollars -- the loan
pushers to the U.S. government dig into their wallets and
hand out the money. Why? Because they have been assured
by the U.S. government and by economists, most of whom have
been trained at government expense, that governments never
default. Well, anyway, North American governments never
default."A U.S. government bond is as sound as the
dollar." This is true because a U.S. government bond is
denominated in dollars."You can trust the government to
repay its debt," we are assured. While it is true that
this debt is always growing, it is equally true that, year
after year, so is the U.S. money supply. And prices are
always rising.

Why do foreigner investors buy U.S. government debt?
Because they believe what they have been told by U.S.
economists. The best and the brightest of the Asians have
attended U.S. universities, and they have taken courses in
economics.

Why do foreign central banks buy U.S. government debt?
Because their banks copied the Federal Reserve System after
World War II, and the FED buys U.S. government debt. But
why don't central banks buy their own governments' debt
instead of dollars? Because they seek diversification of
asset holdings. The dollar is the world's reserve
currency, and the U.S. government always pays interest on
its debt.

But, you may ask, what happens if the Federal Reserve
System pumps in money to keep U.S. interest rates low?
Won't that push down the value of the dollar
internationally? Of course it will. Then won't foreigners
investors and foreign central banks lose? Eventually, yes,
but not immediately. The international value --
comparative -- of the dollar will not collapse whenever
foreign central banks create new fiat money to buy U.S.
government debt. This is what China's central bank is
doing.

But won't this policy reduce the value of the foreign
nation's currency, or at least keep it from rising? Of
course it will, and that's exactly what exporters in those
nations want. The exorters are pushers of goods. The
central banks are pushers of loans. They act as a team.

Americans are the addicts. For the process to
continue, foreigners must feed the voracious appetites of
Americans for more low-price goodies. America is Wal-Mart
Nation. In America, it's Christmas all year round.

Deck the halls with bows of money. Fa, la, la,
la, la... la, la, la, la!

Even when the money's funny. Fa, la, la, la, la
... la, la, la, la!

Put it on our cards of plastic. Fa, la, la...
la, la, la... la, la, la!

Isn't endless debt fantastic? Fa, la, la, la,
la... la, la, la, la!



DOPE PUSHERS AND DOPEY PUSHERS

You may look at this arrangement and conclude that the
pushers are dopes. Dope pushers push dope, which produces
an inflow of money for the pushers. Dopey pushers push
money, which produces an inflow of IOUs to pay money"one
of these days, Real Soon Now."

If you addict someone to an addictive drug, he will
pay you money today. If you addict him to loans, he will
pay you IOUs today. The drug addict eventually either runs
out of money or else dies. The loan addict never runs out
of IOUs. He will sign those IOUs for as long as there are
money pushers willing to lend him the money. He just can't
stop signing them. He is addicted.

The drug pusher's business would die if he could ever
addict everyone. There would be no more productivity
available to extract by means of drug sales. He knows that
he operates in a niche market.

The loan pusher's business would also eventually die
if he could ever addict everyone. There would be no more
productivity available to extract by means of loans. He
knows that he operates in a niche market.

The goal of the drug pusher is to extract everything
he can from his existing clients, while locating new
clients to replace his existing ones.

The goal of the loan pusher is to keep from having his
existing clients lose their credit rating, because then
their IOUs would fall in value. The problem is, the
clients are absorbing ever more of the pusher's assets.
The loan pusher's capital is more and more filled with IOUs
of his clients.

In the case of the drug market, the addict eventually
runs out of money. The pusher consumes the addict's wealth
and then moves on.

In the case of the capital market, the pusher
eventually runs out of money to lend. The addict consumes
the pusher's wealth and then moves on.

The drug pusher doesn't extend credit. The money
pusher extends only credit. The drug pusher winds up with
the addict's money. The money pusher winds up with the
addicts IOUs.

To survive, the dope addict has to conclude at some
point,"These drugs are killing me. I have to quit."

To survive, the loan addict has to conclude at some
point,"These loans are killing me. I have to quit. I
have to get back on my feet before my pusher quits."

To survive, the loan pusher has to conclude at some
time,"These IOUs are killing me. I have to quit. I have
to find new addicts before this one's credit rating dies."

There are known cases -- few -- in which drug addicts
voluntarily quit. On the whole, however, drug addicts
either die as addicts or run out of willing pushers.

There known cases -- few -- in which loan addicts
voluntarily quit. On the whole, however, loan addicts
either die as addicts or run out of willing pushers.



-----------------------

BETTER A LENDER THAN A BORROWER BE... SOMETIMES

Approximately 3,500 years ago, Moses wrote these words
of warning to the Israelites:

The stranger that is within thee shall get up
above thee very high; and thou shalt come down
very low. He shall lend to thee, and thou shalt
not lend to him: he shall be the head, and thou
shalt be the tail. Moreover all these curses
shall come upon thee, and shall pursue thee, and
overtake thee, till thou be destroyed; because
thou hearkenedst not unto the voice of the LORD
thy God, to keep his commandments and his
statutes which he commanded thee (Deuteronomy
28:43-45).

This is a section of a lengthy passage in the fifth
book of Moses, which records his words to the sons of the
exodus generation, which had all died in the wilderness.
Deuteronomy 28 lists blessings for obedience and curses for
disobedience, but the section on the curses is four times
longer than the section on blessings. I have written a
chapter on this passage in my economic commentary on
Deuteronomy, which is on-line for free:

http://www.demischools.org/deuteronomy-v3.pdf

In Moses' day, as in our day, most people expect
blessings."We're the good guys." To get their attention,
a leader must remind them of curses."Don't become the bad
guys."

By"leader," I don't mean politician. I mean
something like"statesman." Statesmen are always in short
supply in a democracy. There is not much of a constituency
for statesmen. The word"statesman" is applied by
politicians to former high-level office holders in their
party who are no longer expected to run for office. Jimmy
Carter is regarded as a statesman by Democrats because he
isn't going to run and could not be elected if he did.
They are statesmen only for as long as they don't say
anything controversial that might cost their party votes at
the next election.

Moses was not a politician. He was not running for
office. On the contrary, he was about to die. So, he did
not worry about laying down the law, which is what
"Deuteronomy" means: the Greek words for the"second"
(deutero) and"law" (nomos) (In the original Hebrew, the
book is called simply"words," based on the first line,
"These are the words.")

Moses was speaking of lenders inside national Israel.
The people who exercise political control are the people
who supply the capital. They are the money-lenders. Half
a millennium later, King Solomon commented,"The rich
ruleth over the poor, and the borrower is servant to the
lender" (Proverbs 22:7).

What Moses said of domestic economic power applies to
international economic power. The difference is this:
there is no common civil government. There is no common
enforcer of contracts. So, the lender had better pay close
attention to the solvency and ethics of the borrower. If
the borrower gets too deeply in debt to the lender, the
lender's own credit rating is at risk. If the borrower
defaults, he may take the creditor with him.

The problem is, central banks are in control of their
nations' money supply, nation by nation. Central banks are
government-created monopolies, not private, profit-seeking,
competitive, risk-assessing companies whose owners have
their own capital at risk. Central bankers, who have no
ownership in the organizations they run, can buy IOUs
merely by creating new money. So, because central bankers
are in charge of their nations' money supply, the average
domestic investor is at the mercy of the good judgment of
his nation's central bankers.

When the government that ultimately controls the
central bank favors a special interest group that wants to
export goods to debtor nations, central bankers will adopt
policies of money expansion in order to keep the
international value of their nations' currencies low. They
will buy the IOUs of the debtor nations, i.e., goods-
importing nations.

For a time, both parties seem to win. The pusher
accumulates IOUs that are denominated in the currency of
the addict. The addict accumulates consumer goods that
depreciate over time. It's the story of the grasshopper
and the ants, with this variation: the ants sells their
summer's excess crop in exchange for IOUs from the
grasshopper, who promises to pay next winter. The
grasshopper and the ant are both likely to have a hungry
winter. This would make a depressing Disney cartoon.

When a person, a bank, or a nation lends money to an
economic grasshopper, he is taking a risk. When the
grasshopper becomes the lender's main client, the borrower
is no longer servant to the lender. It's the other way
around."Cut off the funds, and I'll declare bankruptcy,"
threatens the borrower."Then where will you be?"

At some point, the loan pusher has to go cold turkey
on IOUs, which forces the debtor to go cold turkey on the
goodies. This event is called worldwide depression. It's
not a happy event -- like winter in the revised
ants/grasshopper story.


CONCLUSION

I keep thinking of Philip Ahn's final role. Like
Richard Loo ("You are surprised I speak your ranguage. You
see, I was educated at UCRA"), Ahn did well during World
War II playing ruthless but wily Japanese Army officers.
Postwar B-rated movies about World War II also kept him out
of the unemployment lines. He ended his career playing the
monk who trained David Carradine in the art of kung-fu.
The old master called his disciple"Grasshopper." Now,
that's prophetic!

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gesamter Thread:

• Die Lage der Bank of Japan - längst von Gov subventioniert... - dottore, 08.01.2004, 17:04
  • Katastrophaler Kreislauf - Tofir, 08.01.2004, 17:41
    • Re: Der Hamster im Laufrad kommt zwar auch nicht voran, hat aber seinen Spaß - JoBar, 08.01.2004, 19:21
      • Oder: Der Kneiper (Japaner) bedient seinen Alkoholiker weiter, in der Hoffnung, - LenzHannover, 09.01.2004, 18:22
        • Re: Bravo, genau beobachtet - Spiele der Erwachsenen, Teil II (owT) - Jagg, 09.01.2004, 19:16
          • So kann man es vielleicht normalen Erwachsenen erklären:-) (owT) - LenzHannover, 11.01.2004, 20:43
    • Gary North: Addicts and pushers - Miesespeter, 08.01.2004, 20:13
  • So ähnlich wird das dann doch in den europäischen ZBs auch laufen - Heller, 08.01.2004, 18:52
    • Nein, wegen des Goldes liegt der Pfeffer hier woanders im Hasen, oder umgekehrt (owT) - Theo Stuss, 08.01.2004, 19:08
  • wie sagte Henry Ford so schön... - Aristoteles, 08.01.2004, 19:06
    • Re: wie sagte Henry Ford so schön... - dottore, 09.01.2004, 14:22