Thursday, December 18, 2008

The Pirate King

"It is, it is a glorious thing to be a pirate king" - Gilbert and Sullivan

Hat tip to Naked Capitalism for this one from London Banker.

The Banker is clearly right that the biggest risk we face now is the lack of access to credit for the US gov't. That is a real possibility now for the first time in my life, and one that might impose fiscal discipline on the government where generations of Republicans failed. On the other hand, it might not, and then we will in truly interesting times indeed.

I like how the Banker describes the deleveraging of the US financial sector as financial piracy against East Asia and the Gulf States. Unfortunately, he's just wrong on that score. The reason that the US (and to some extent the UK) got its role as the world's banker is because it has the a strong tradition of property rights and the Rule of Law. It is only in that environment that a private banking sector as we know it can develop. These other countries don't have these things, that's one of the reasons why they have to send the money over here. That's something to bear in mind, "...Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance..." If, as a result of this bubble bursting, they were to develop these things it would be best for all concerned.

There's also the fact, as Spengler would surely note, that US has the risk-taking young people willing to borrow. The greying populations of East Asia don't so it's not exactly clear who's going to be able to generate the "reasonably predictable positive return" the Banker requires.

Finally, the Banker doesn't dwell on it too much in that post, but he also likes to hate on the knowledge economy. For all the talk about sustainability, it ought to be clear that the knowledge economy is much more sustainable than the alternatives, usually taken to be agriculture or manufacturing. The trend in that direction has been going for decades, arguably centuries. Not only are manufactured goods cheap to produce, there also not worth very much. What's worth more to you, a correctly filled prescription by a reputable pharmacist, a new iPod, or a twenty pairs of socks. I'm guessing there's not too many people who would choose the last.

No comments: