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March 20, 2008

Credit and Credibility (Historical)

Each passing day headlines warn that America’s home mortgage problems seem a little worse; however the articles accompanying those headlines suggest that the fears expressed are more vague than specific and don’t even mention the worst possibility: the nation itself may be bankrupt.

Credit, in the final analysis, measures one’s ability to borrow, which, in turn, reflects potential lenders’ confidence they will be repaid, a concept that quickly exposes one of several systemic weaknesses of the “Global Economy” that distributes goods and services 24/7 to an estimated six-point-six billion humans. The real question might well be: have we reached the limit of the global economy’s ability to function? Can it survive the bankruptcy of its most productive nation?

An equally imponderable collateral question then becomes: what would be the long term consequences of such a failure?

One answer is that the current crisis is (at least) another bump along the road of human history; at least reminiscent of the Great Depression of the Nineteen Thirties. While we know how that one played out (the species survived and went on increasing its numbers), it was nevertheless, a painful and expensive process, involving, as it did, a Second World War and the development of nuclear weapons.

Although WW II’s aftermath included US sponsorship of the United Nations to replace the short-lived League of Nations, it had been the US that emphatically rejected the very idea of world government as put forth  by an American President re-elected in 1916 because he “kept us out of war,” during his first term, but then led us into the (same) “war to end all wars” during his second. Shortly before that second term ended, he'd sustained a fatal stroke and thus never learned of US refusal to participate in the idea he’d pinned so much hope on.

In searching for an equivalent policy failure, the Eighteenth Amendment, also passed in 1919, the same year the Peace of Versailles was implemented, qualifies easily. Although the hyperinflation of the rarly Weimar Republic had ended in the early Twenties,  it set the stage for Hitler's “legal” elevation to Chancellor by a gravely ill Hindenburg in January 1933. The League itself was totally  ineffective from then on, although it wasn’t finally pronounced dead until after V-J Day.

To the extent credibility also depends on one’s record for meeting financial obligations;  experience has shown that the amount demanded may be significantgly reduced by the perceived impact of a given debtor’s bankruptcy on the overall economy.

 In terms of the current US debt owed to China for consumer goods delivered since Hong Kong and the Kowloon Peninsula were returned by Great Britain under terms of the treaty that ended the Second Opium War, that example, plus Chrysler’s rescue in the Seventies, and that of Bear Stearns today, all seem laden with significance.

Perhaps the most durable notion to emerge from all this is very familiar: there’s still no such thing as a free lunch...

Doctor Tom

Posted by tjeffo at March 20, 2008 06:45 AM