This week Allan Greenspan, former Chairman of the Federal Reserve for twenty years, and arguably one of the most influential men in the World, wrote an article for the Blog ‘The Daily Reckoning’, entitled “The Gap Between Disaster and Prosperity.”
The event might be taken as extraordinary, because the authors of, and contributors to, The Daily Reckoning have been highly critical of Greenspan’s policies. In particular the “laissez-faire attitude, that contributed to the Housing Market Bubble and the Credit Crisis that followed in 2008.
Interestingly Greenspan did not take the opportunity for a mea culpa (he has done that on numerous occasions) but rather to reinforce the vital importance of Savings, and Investment for the long-term viability of the World Economy. Put another way we need savers as well as spenders to make things work smoothly. Nothing particularly new here.
It was what else he said, in a more erudite fashion, that caught my eye as a confirmation, for what I was trying to get across in a former post “The Skin of the Gods” and also at the tail end of my book “The Accidental Gold Miner”
There is a historic dichotomy between Savers and Consumers that still plays out every day in the valuation of the US Dollar against gold and hard paper currencies (Swiss Franc) The consumers believe in using debt to finance an ever-increasing standard of living whereas the savers avoid debt and consume only when they have the required means.
It is the savers (China Indonesia, India Japan et al ) that finance the debt of the consumers (North America, Europe GB et al), and it is Globalization of trade, that had allowed for the incredible expansion of credit without inflation, (There are now a lot more Savers than Consumers) Think of it like a great big sponge soaking up the trillions of US Dollars that are floating around the World.
At present it would appear as though fear is winning out over greed and the savers have the upper-hand. This is a condition that can lead to the dreaded Japanese Condition ( over ten years of no economic growth) or Deflation as it is sometimes called, when it is accompanied by falling prices.
Central Banks, as well as Sovereign Governments, are now held accountable for the financial well-being of their citizens, that has come to mean increasing standards of living. This has recently been evidenced by a sea change in the leadership of India, the largest Democracy in the World, wherein a majority of citizens, apparently now wish to become educated consumers (as opposed to predominantly savers) The same might be applicable to China, where the masses may only be willing to stomach the Proletariat, so long as their standard of living is increasing.
These two Goliaths’ make up nearly half the population of the World. If they succeed in continuing to increase the standard of living of their citizens, they will drag the economies of the Western Industrialized nations with them (assuming the continuation of globalization) This is a given. What is much more difficult to ascertain is whether the present hegemony of the US Dollar, as the only international accepted medium of exchange, will allow this to happen.