China won't solve Europe's debt problems(Read article summary)
China has stressed it will not be a savior to Europe as President Hu Jintao embarks on an official visit to the continent
Ng Han Guan/AP
Whatâs happening to 2011? Itâs disappearingâŚ
Yesterday was warm and sunny in this part of the world. Today, it is raining and gloomy.
This is All Saints day. After the mass, weâll go over to the cemetery to put chrysanthemums on a family grave. Why chrysanthemums? We donât know. But everyone does it. The graveyard will be as busy as a subway station today.
Investors seem to have turned gloomy too. The Dow lost 276 points yesterday. Gold fell $22.
Whatâs behind it? Maybe this had something to do with it. From the Telegraph:
The warning came as European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy urged G20 leaders to use the meeting of major economies to address Europeâs debt crisis, saying measures proposed last week were not enough by themselves.
French President Nicolas Sarkozy has said Beijing had a âmajor role to playâ in proposals to expand the European Financial Stability Facility (EFSF) to âŹ1 trillion (ÂŁ877bn), possibly through a special purpose investment vehicle that would attract backing from sovereign wealth funds.
The head of the bail-out fund, Klaus Regling, was despatched to Beijing to discuss terms, but travelled on to Japan at the weekend without an agreement.
China, holder of the worldâs largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing.
The official Xinhua news agency, used to communicate Communist Party policy, said Europe must address its own financial woes. âChina can neither take up the role as a saviour to the Europeans, nor provide a âcureâ for the European malaise,â it stated. âObviously, it is up to European countries themselves to tackle their financial problems.â
Darned. Maybe the European rescue is not quite the done deal they thought it was. Europeâs heads of state said they would begin to commence to start putting together a plan to sort out the debt mess. Thatâs not the same as actually sorting it out. And it leaves out the essential bit of information â whoâs going to pay?
Youâll notice that Europeâs envoy also paid a visit on the Japanese. Thatâs where this story becomes clearâŚand funny. Asking Japan for a loan is like asking a starving man for a piece of chocolate cake. Japan already has more government debt than anyone. Its public debt-to-GDP ratio is up to 230%.
Meanwhile, pressure is mounting on poor Silvio Berlusconi. Forget the Bunga-Bunga parties. Forget the underage prostitutes. Silvioâs problem is in the bond market, where yields on the 10-year note rose to 6.1% yesterday.
Almost all the developed nations have so much debt they canât think about paying it back. They only worry about keeping up with the interest and refinancing costs. Japan only gets away with its debt burden because inflation and interest rates are both zero. It doesnât cost anything to carry the debt.
But imagine that you have debt of 230% of GDPâŚand imagine that you have 6% interest. You can do the math. Youâre paying 14% of GDPâŚjust to keep up with the interest payments on money you spent years ago. In the US, that would be more than 30% of the entire federal budget. It would be 2/3rds of all tax revenues. It would be a disaster, in other wordsâŚ.
âŚit would also not happen. Because bond investors arenât stupid. They would see immediately that they werenât going to get their money back. They would sell bondsâŚforcing up interest rates even higherâŚand causing a meltdown of the whole system.
Thatâs the thing about debt. Somebody always pays. If not the debtor, as planned, then the creditor must pay. Or the taxpayer.
Debt never disappears. It represents resources that have been borrowed from the future. And the future never forgets. The future is a ShylockâŚalways demanding its pound of flesh at the most inconvenient moment.
Here in France, there was a skit on TV that made its way to YouTube. It shows a cartoon character who looks for all the world like Barack Obama going up to an ATM machine. He puts in his card. But he finds he cannot get any money.
So, he goes to the Bank of China to get a loan. The Chinese banker, who bears a remarkable resemblance to Chinaâs premier Hu Jintao makes the loan. But the Chinese want their pound of flesh too. In the next scene, Obama and French president Nicolas Sarkozy are both carrying a dragon in a Chinese New Yearâs parade.
And yet, China has more than $3 trillion in savings. It is the rising starâŚthe young, growing power. Like the US in the early 20th century, it is the nation to which the tired, old countries of the developed world look to finance their mistakes.
America financed Britain and France in WWI. But it did so for good reason â the money it lent was largely used to buy supplies from the US. Same thing in WWII. Lending money was a good business decision. After the wars were over, the US wanted its pound of flesh too. Trouble was, the debtors didnât have a pound left.
for The Daily Reckoning