February 20, 2004

Ultimate Consequences

One way to describe the willingness of Asian countries to buy U.S. bonds and keep their currencies weak is to call it for what it is: vendor financing. Loaning money to your customers so they can afford to buy your products is a risky proposition, however. So is keeping your currency cheap in order to make your exports competitive, so Americans can buy them on debt. Sooner or later, you either lend more money to your cash-strapped customer, or he stops buying because he's got not resources himself. As a vendor, the sooner you realize this, the sooner you'll stop lending. From this article it looks like the Japanese are beginning to realize that selling to Americans on credit has its own kind of economic blowback. "...counting on the seemingly insatiable appetite of the American customer, the allocation of economic resources in the Japanese and other Asian economies appears to have been distorted to a larger extent than before. "In this trans-Pacific macroeconomic picture, Japan and the other Asian nations appear to be behaving like innocent merchants willing to sell on credit as much as their customers want. This framework has persisted for the past three decades or so, ever since the United States began to float the dollar in the currency market. "Sensible persons even without business expertise know the ultimate consequences of such relations between merchants and customers. " Indeed they do. Bankruptcy for the customer, non-performing loans for the vendor. Wasted capital for everyone.


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