SPEAKING
FREELY When money and mouth
diverge By Max Fraad Wolff
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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For millennia, sage
voices have cautioned against following where
others announce they are headed. There has rarely
been a place or time where this is more profoundly
true than in today's United States of Speculation.
Yet this simple maxim is proving hard to follow
amid all the spin, dissonance and euphoria.
To see what's really happening in the
world of credit, let's compare the "money and the
mouth" and see where the money is headed and where
the mouth is loudest. Pronouncements from
the
US Congress and economic pundits loudly center on
the strength of the US economy and the sunshiny
future. But investment flows - public, private and
international - suggest something very different.
No example is crisper or clearer than the two
recently unveiled massive preemptive actions
undertaken ahead of the coming wave of insolvency.
This is an issue of global importance, as
monetary expansion slows in the US, Australia,
Europe and Japan - thus, globally. As the
cheap-money tide recedes, we will be shocked to
see many have been swimming without suits. On the
eve of the 16th quarter-point interest-rate hike
by the US Federal Reserve, it is hard to argue the
direction of rate change. Recent announcements
from the Bank of Japan and the European Central
Bank alike leave little doubt about the direction
of coming rate changes: up. And this will mean
less cash for rolling over debt and higher carry
costs, which portends trouble.
Two recent
statements, one from an institution and the other
from an academic, offer a glimpse of the future:
WASHINGTON, April 21, 2006 - The
World Bank announced today that the Multilateral
Debt Relief Initiative has been approved,
clearing the way for cancellation of
International Development Association (IDA) debt
to some of the world's poorest countries.
Starting on July 1, 2006, [the] IDA is
expected to provide more than US$37 billion in
debt relief over 40 years. Voting on the
initiative remains open until April 28.
[1]
Now, one might have certain issues
with this trumpeted generosity from the World
Bank, but that is an issue for another article.
Today, I would merely like to juxtapose this to
the generosity being offered to the debt-burdened
American public, which buys more from Wal-Mart and
Exxon every year than the gross domestic product
(GDP) of sub-Saharan Africa times two.
In
the view of Nancy Rapoport, dean of the University
of Houston Law Center and a bankruptcy expert:
"Fewer people are going to be able to get out of
debt under this new bankruptcy law." [2] Rapoport
was referring to the Bankruptcy Abuse Prevention
and Consumer Protection Act of April 2005, a
tightening of US bankruptcy laws passed last year
in an effort to curtail perceived abuse of the
statutes.
What these two comments together
make clear is that debt-forgiveness opportunities
are in transition. What a difference a year makes:
one door is opening and another closing. I would
argue that there is huge symbolic value in these
two decisions. Taken as rational and cut from the
same cloth - easily argued against, but not
without possible merit - these laws represent
global economic shifts rather nicely.
As
the annual profits of S&P500 corporations
become increasingly de-linked from US
macroeconomic performance, and revenues and
profits outside the US rise toward and above US
revenues and profits, changes are in the offing.
Different needs and strategies for the US and the
rest of the world emerge, and are passed into law
and policy.
The passages of the World Bank
Multilateral Debt Forgiveness Initiative and the
Bankruptcy Abuse Prevention Act of 2005 signal a
divergence between the directions of money and the
running of mouths. The future for American
consumers involves a mandated quest toward
increasingly suspect repayment of debt. The future
for offshore areas, by contrast, may involve the
extension of debt to facilitate spending.
Provision of modest credit lines at high rates
around the developing world is a fast-growing
global business. But the inevitable, approaching
and long-overdue reduction in debt-fueled
consumption in the US will be a huge challenge to
the global economy.
The extension of debt
to other areas will be an essential component of
weathering the storm. Producers the world over
will face decline, default and trouble in their
top market. Financial firms will as well. Credit
provision to other buyers will be essential.
Collecting on the old debt granted to US
households will become paramount. This low road is
well traveled by less developed countries. It may
well soon be clogged with refugees from the
leveraged US consumer bonanza of the past two
decades.
How else would one make sense of
these two major recent credit developments? Mouths
speak of America's bright future, but the money is
going offshore. Hedge funds, private equity and
mutual-fund flows increasingly head overseas for
enhanced growth opportunities. Offshoring and new
foreign-capacity growth by US-based multinationals
proceeds apace. Pundits promise opportunity, but
even as they speak, the legal structure is
morphing for a confrontation over massive debts.
The Bankruptcy Act of 2005 is a
declaration by financial firms and credit card
companies that priority one is getting the money
already lent - not future business. The World Bank
Initiative suggests the opposite stance toward
segments of the developing world. Recent repayment
actions from Brazil, Russia and Argentina likewise
suggest creditworthiness rising overseas, while it
declines alongside rising debt in the US.
Money and mouth are not in alignment.
Which way are you betting?
Notes 1. Announced on the
World Bank website, April 21. 2. From the
Christian Science Monitor.
Max Fraad
Wolff is a doctoral candidate in economics at
the University of Massachusetts, Amherst and
managing director of GlobalMacroScope. This work
was written for www.GlobalMacroScope.com.
(Copyright 2006 Max Fraad Wolff. Used by
permission.)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click hereif you are interested in
contributing.
