The Crash

Much soul searching in the papers about the cause of the stock market crash, if crash isn’t too shocking a word (and it isn’t for most of our papers) including an interesting but in my view narrowly complex article by Martin Wolf in the FT. Wolf says the cause of the astonishing boom, followed by the crash is “the massive flows of surplus capital from Asian emerging economies (notably China), oil exporters and a few high-income countries”

And then “Surplus savings meant not only low real interest rates, but a need to generate high levels of offsetting demand in capital-importing countries, of which the US was much the most important”

So in a word there were massive amounts of money in these Asian countries keeping interest rates artificially low – hence the boom. Now it is perhaps tempting for us in the West to say it was all the fault of the Asians but I rather think this has some merit. China booms because it pays its citizens very low wages and they produce very cheap goods. People internationally buy them. So far so good. Now what would you expect to happen? People owning the factories get rich and buy lots of things: some Rolls Royces and houses in Malibu but lots of things in China, too. Others get rich supplying those things, and the wage rates rise.

Not so in China however where the State holds down pay rises, controls where people can set up factories and stops entrepreneurs benefitting from their earnings by making them sell all the foreign currency at a lousy rate to the State, and making sure there’s nothing for them to spend it on in China. Similarly in oil producing countries the money goes into the hands not of the spending public but of a few families or corrupt officials. So massive surpluses are built up in State entities (Sovereign Wealth Funds are what we call them now) and invested in America.

If these countries had not been dictatorships (not too strong a word either for China or most of the Middle East) there wouldn’t have been the boom and bust in the USA but there would have been a relative increase in wealth and importance of the Far East. This last is now probably going to happen anyway, but the hard way, and without the citizens of these countries benefitting.