Tony Boeckh postulates on how the global economy is changing in the midst of the credit crisis, and following the outcome of last week's G20 meeting in London.
Here is an excerpt from this informative and enlightening paper:
"The underlying cause of the credit meltdown and near-collapse of the global banking system was the deeply flawed international monetary system. This enabled the US to run large and persistent current account deficits since the mid-1980s (Chart 1). This in turn allowed credit at US financial institutions to expand at a pace which was not only unsustainable, but put many millions of families and firms in totally untenable debt servicing situations (Chart 2 - next page). They spent substantially beyond their means over many, many years, which is the counterpart of the collapse in US savings."
This dynamic has left the US, as a country, massively over-indebted to foreigners who have acquired a huge net claim on the US, which represents the foreign financing of US overspendng.
So, we are left with US residents over-indebted to their financial institutions and the US, as a country, over-indebted to foreigners. While the former - US borrowers and lenders - are being bailed out on a grand scale, the debt to foreigners is another matter entirely. In particular, as Chart 1 also shows, the cumulative US current account deficit since the mid-1980's, now totals $7.5 trillion and is climbing at the rate of $700 billion per year, down from $800 billion recently.
Without going into complications, there are a variety of capital flows into and out of...
Read this whole paper by Tony Boeckh, Boeckh Investments, HERE.
Boeckh is right at home in the global credit markets. From 1968 to 2002, he was chairman, chief executive and editor-in-chief of Montreal-based BCA Publications, publisher of, among others, the highly regarded Bank Credit Analyst, a monthly big-picture analysis of the U.S. economy and financial markets. BCA is now owned by Euromoney.
He was also chairman of Greydanus, Boeckh and Associates from 1985-99, a fixed-income investment firm which managed $2-billion in assets when it was sold to Toronto-Dominion Bank in December, 1999.
With a PhD in finance and economics from The Wharton School, University of Pennsylvania, Mr. Boeckh has taught economics at McGill University and is a founding trustee of the Fraser Institute. [Financial Post]
