The Wages Of Fear

Historian Paul Johnson, author of Modern Times, The Birth Of The Modern, A History Of Christianity, and other fine tomes written for the intelligent layman, makes a striking observation in his column of today:

In the 15 or so years since 1990 the U.S. current accounts deficit has gone from 0% to 7% of GDP. America is able to do this by offering the rest of the world the biggest choice of wealth storage options -- bonds and other assets -- that they can buy with their savings, knowing these instruments are secure and will give a good return on investment. The truth is, if you make a lot of money by making cheap goods, as the Chinese do, or by selling expensive oil, as the Arabs do, you either have to spend your money, riotously, or save it. And if you choose to save, you have to put those savings somewhere that is secure and rewarding.

Thanks to its political and social stability and its record of a continually growing economy, the U.S. has become -- almost unconsciously rather than through set policy -- the biggest and most successful wealth-storage economy in history. It exports wealth-storage facilities in exchange for net imports of goods. A recent calculation by the American Enterprise Institute shows that foreign storage claims of U.S. assets are $13.5 trillion, or about 25% of U.S. wealth (about 10% of global wealth).

However, as with Jimmy Goldsmith, this borrowing has enabled the U.S. to become richer and richer. The U.S. also invests abroad and now holds about $11 trillion in foreign assets. That leaves net foreign claims on U.S. assets of about $2.5 trillion. But this is only 20% of one year's income for America's enormous GDP. Moreover, while wealth stored in the U.S. is mostly in short-term assets, American wealth stored abroad is chiefly in long-term assets, and those will grow in value -- and grow faster -- than wealth stored in the U.S.

This is both staggeringly important and truly ironic. First, Johnson is entirely correct: the rest of the world is a scary place for money or property. He who has either must live in perpetual fear of being deprived of them by a sudden currency devaluation, a new tax scheme, or an outright expropriation "for the public good." Such things do happen here as well, but much more rarely and to a much milder degree. Thus, comparatively the United States is a haven for capital, the jumpiest of all Man's creatures. More, it will remain so for the indefinite future, as the condition cannot be undone except by the erection of a totalitarian dictatorship here in America, or the radical liberalization of the economies of the other nations of the world.

The irony is this:

There is no need in human life so great as that men should trust one another and should trust their government, should believe in promises, and should keep promises in order that future promises may be believed and in order that confident cooperation may be possible. Good faith -- personal, national, and international -- is the first prerequisite of decent living, of the steady going on of industry, of governmental financial strength, and of international peace....

We knew nothing of "hot money" on a large scale in the decades that preceded World War I, when great governments protected the gold standing of their currency as a matter of course, because it was the honorable and expected thing to do. But since the bad faith of the two greatest governments in the world, Great Britain in 1931 and the United States in 1933, we have had a world full of hot money, jumping about nervously from place to place, seeing no safety anywhere, but going from places that seemed unsafe to places that seemed less unsafe. We have had a world in which men have been afraid to make long-term plans. We have had a world in which conscientious and scrupulous trustees have been turning from "gilt-edged bonds" toward common stocks, not because the common stocks were safe, but because they were less unsafe than government obligations, and we have had them doing this with the approval of scrupulous and upright judges who have taken cognizance of the bad faith of the government....

There was bad faith by the British government, and there was bad faith by the United States government in abandoning the gold standard.

[From Dr. Benjamin M. Anderson's Economics And The Public Welfare, Chapter 45, on Franklin D. Roosevelt's abrogation of the gold standard and seizure of the nation's privately held gold.]

Food for thought.