July 20, 2017

Where would China be if western world had not placed a reverse mortgage on their economies, in order to keep on buying?

Sir, with interest I have read Martin Wolf’s “How the developed world lost its edge” July 20. In my opinion Wolf ignores two major events that had these not happened would have radically changed the current outlook.

First, regulators told banks: “Go out in the market and negotiate the best risk-adjusted net margins you can. And then, in order to make sure you do not take risks, we will allow you to multiply these margins much more in the case of assets perceived as safe than in the case of risky assets.”

That of course led to the accumulation of excessive exposures and against very little capital (equity), to something ex ante perceived decreed of concocted as safe, like AAA rated securities and sovereigns, which when ex-post turning out very risky caused the 2008-crisis.

And then central banks, with their QEs and ultralow interest rates, hindered the necessary market cleanup, and kicked the 2008-crisis can down the road, a road made unproductive by previous mentioned regulatory risk aversion.

So what resulted? No adjustment and further indebtedness, which allowed prices of assets to increase and demand (among other of Chinese production) to be sustained… further allowing the Chinese to save. 

Wolf writes: “The rapid growth of both trade and cross-border financial assets and liabilities and trade, relative to global output, has come to a halt. In the case of finance, plausible explanations are risk-aversion and re-regulation”. “Risk-aversion”? Yes, but not any new one but that which result from regulators loading up, on top of bankers’ natural risk aversion, there own aversion based on the same perceived risks. The bankers lend you the umbrella when the sun shine’s Mark Twain, would never have believed his eyes had he seen such regulatory nonsense.

Sir, as I’ve written to you many times before, never ever has a generation taken on so much debt to finance their own consumption, and shown so little respect for the needs of future generations, those needs that include bankers lending to risky SMEs and entrepreneurs.

How can a Western world made great by taking risks, not lose its edge by avoiding it?

Wolf concludes with: “Rising populist pressure across the high-income economies makes managing these shifts far more difficult.” Indeed, but let us not forget that this mess began when some truly inept populist technocrats, like real life Chauncey Gardiners, convinced governments they knew what they we doing.

PS. Martin Wolf also fell for it.