China won't solve Europe's debt problems
What鈥檚 happening to 2011? It鈥檚 disappearing鈥�
Yesterday was warm and sunny in this part of the world. Today, it is raining and gloomy.
This is All Saints day. After the mass, we鈥檒l go over to the cemetery to put chrysanthemums on a family grave. Why chrysanthemums? We don鈥檛 know. But everyone does it. The graveyard will be as busy as a subway station today.
Investors seem to have turned gloomy too. The Dow lost 276 points yesterday. Gold fell $22.
What鈥檚 behind it? Maybe this had something to do with it. From the Telegraph:
China has stressed it will not be a 鈥渟aviour鈥� to Europe as President Hu Jintao embarks on an official visit to the continent that will take in this Thursday鈥檚 crucial G20 summit in Cannes.
The warning came as European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy urged G20 leaders to use the meeting of major economies to address Europe鈥檚 debt crisis, saying measures proposed last week were not enough by themselves.
French President Nicolas Sarkozy has said Beijing had a 鈥渕ajor role to play鈥� in proposals to expand the European Financial Stability Facility (EFSF) to 鈧�1 trillion (拢877bn), possibly through a special purpose investment vehicle that would attract backing from sovereign wealth funds.
The head of the bail-out fund, Klaus Regling, was despatched to Beijing to discuss terms, but travelled on to Japan at the weekend without an agreement.
China, holder of the world鈥檚 largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing.
The official Xinhua news agency, used to communicate Communist Party policy, said Europe must address its own financial woes. 鈥淐hina can neither take up the role as a saviour to the Europeans, nor provide a 鈥榗ure鈥� for the European malaise,鈥� it stated. 鈥淥bviously, it is up to European countries themselves to tackle their financial problems.鈥�
Darned. Maybe the European rescue is not quite the done deal they thought it was. Europe鈥檚 heads of state said they would begin to commence to start putting together a plan to sort out the debt mess. That鈥檚 not the same as actually sorting it out. And it leaves out the essential bit of information 鈥� who鈥檚 going to pay?
You鈥檒l notice that Europe鈥檚 envoy also paid a visit on the Japanese. That鈥檚 where this story becomes clear鈥nd funny. Asking Japan for a loan is like asking a starving man for a piece of chocolate cake. Japan already has more government debt than anyone. Its public debt-to-GDP ratio is up to 230%.
Meanwhile, pressure is mounting on poor Silvio Berlusconi. Forget the Bunga-Bunga parties. Forget the underage prostitutes. Silvio鈥檚 problem is in the bond market, where yields on the 10-year note rose to 6.1% yesterday.
Almost all the developed nations have so much debt they can鈥檛 think about paying it back. They only worry about keeping up with the interest and refinancing costs. Japan only gets away with its debt burden because inflation and interest rates are both zero. It doesn鈥檛 cost anything to carry the debt.
But imagine that you have debt of 230% of GDP鈥nd imagine that you have 6% interest. You can do the math. You鈥檙e paying 14% of GDP鈥ust to keep up with the interest payments on money you spent years ago. In the US, that would be more than 30% of the entire federal budget. It would be 2/3rds of all tax revenues. It would be a disaster, in other words鈥�.
鈥t would also not happen. Because bond investors aren鈥檛 stupid. They would see immediately that they weren鈥檛 going to get their money back. They would sell bonds鈥orcing up interest rates even higher鈥nd causing a meltdown of the whole system.
That鈥檚 the thing about debt. Somebody always pays. If not the debtor, as planned, then the creditor must pay. Or the taxpayer.
Debt never disappears. It represents resources that have been borrowed from the future. And the future never forgets. The future is a Shylock鈥lways demanding its pound of flesh at the most inconvenient moment.
Here in France, there was a skit on TV that made its way to YouTube. It shows a cartoon character who looks for all the world like Barack Obama going up to an ATM machine. He puts in his card. But he finds he cannot get any money.
So, he goes to the Bank of China to get a loan. The Chinese banker, who bears a remarkable resemblance to China鈥檚 premier Hu Jintao makes the loan. But the Chinese want their pound of flesh too. In the next scene, Obama and French president Nicolas Sarkozy are both carrying a dragon in a Chinese New Year鈥檚 parade.
And yet, China has more than $3 trillion in savings. It is the rising star鈥he young, growing power. Like the US in the early 20th century, it is the nation to which the tired, old countries of the developed world look to finance their mistakes.
America financed Britain and France in WWI. But it did so for good reason 鈥� the money it lent was largely used to buy supplies from the US. Same thing in WWII. Lending money was a good business decision. After the wars were over, the US wanted its pound of flesh too. Trouble was, the debtors didn鈥檛 have a pound left.
Bill Bonner
for The Daily Reckoning
