Monday, March 16, 2009

Blame the Americans

It has become very fashionable to blame the US for this mess.

Many leaders have blamed US mismanagement (financial sector, subprime, hedge funds, etc…) for this crisis.

France President Sarkozy blamed the US back in the innocent days of late 2008.

British Prime Minister Gordon Brown stated in October:

"This problem started in America. They have got to sort it out," he said then.

Our PM said this last week:
"We will not turn the corner on this global recession until the American
financial sector is fixed," he said.

His buddy Tony Clement also blamed the Americans
“Only American consumers can save the flattened auto industry from extinction,
he said.”

With friends like this….

The foes of the US, if you can put China and Russia in this category, have also heaped blame on the US in recent months.

I vehemently disagree with the blame the US approach.

Yes, as the largest economy in the world, the US has played a large role in this mess.

However, let’s ponder the following questions. Did the US cause:
1. Northern Rock in the UK to go under?
2. Hypo Real in Germany?
3. Iceland to go bankrupt?
4. Dubai to be in big trouble?
5. Ireland to be in big trouble?
6. SocGen in France to lose billions in January 2008?
7. European banks to lend billions to Eastern Europe threatening the entire European system
8. Housing bubbles imploding in many countries all around the world
9. The Chinese stock market bubble
10. The Russian stock market bubble

I could go on….

The US was the biggest piece of the puzzle but all nations were part of this. The US and the other so called Anglo-Saxon countries, including Canada, (“USAF”- US and friends) all over consumed and under saved. The Asian countries all over saved and under consumed. The Asian countries exported to the Anglo-Saxon countries and then recycled the US dollars into reserves composed mainly of US treasuries. This lead to low US interest rates (and hence, global interest rates) which lead to more consumption by Anglo-Saxon consumers, and a virtuous cycle known as Bretton Woods II (BWII) continued for most of this past decade.

Everyone played the game and everyone knew of the inherent problems. The US ran huge trade deficits mostly to Asian exporters such as China and Japan. There were all types of weird things that should have been evidence of an unsustainable buildup of imbalances:

  • zero savings rates in USAF
  • huge trade deficits
  • continual pressure on the US dollar
  • Rampant asset price inflation, especially in housing
  • soaring commodity prices
  • soaring debt/GDP levels worldwide
When things were good, did all the blame gamers thank the US for causing their prosperity? Of course not. In reality, we all benefited from Bretton Woods II.

In Canada, these soaring commodity prices and housing prices allowed the economy to boom. Government spending and tax cuts were doled out and yet the budget remained magically in balance, thanks to the factors mentioned above. Now that BWII is now dying, big structural deficits are back in Canada. In Canada, we all benefited from the US housing bubble that created demand for our exports. Our aerospace sector benefited from the super rich US billionaires ordering business jets (Stanford ordered one).

Worldwide, everyone was greedy. People chased risky assets worldwide. People perpetuated the myth of a super commodity cycle. Scapegoating the US is easy. In reality, we were all part of the game. The US was the biggest player but Canada and others were all involved. Who told the Asian countries to become so dependent on exports to ASAF? Who told European banks to lend so aggressively to Eastern Europe? Was it the US?

The boom was long and global and the bust will be long and global.

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