In case you don’t know of him . . . Steve Randy Waldman


and his mellifluously titled blog interfluidity are often very interesting. He doestn’t post all that often, but that’s what Google Reader is for – you don’t have to visit his site to know if he’s got any new offerings. Steve is interested in the financial markets and in particular in the way in which markets are parcelling up what looks like manageable, relatively predictable risk but possibly increasing the damage that might be done if any really big and unpredicatble things happen.

Steve works this theme in lots of different ways and recently argued that by selling its debt to the rest of the world the US was getting itself Dutch disease (an overvalued exchange rate hampering other industries in the traded sector) – just as the Dutch did when they exported lots of North Sea Oil.

All in all, I think it is accurate to claim right now that the United States is suffering from “Dutch Disease”, with a little twist. America’s “resource curse” doesn’t come from some newfound ocean of oil. (Thank goodness for that.) Our curse is that our paper is suddenly unusually valuable, and that we are skewing our economy towards mining, packaging, and exporting ever more of the stuff. Unlike oil, our capacity to produce paper will never be exhausted. But the strange circumstance whereby American IOUs command a high price in real goods from abroad may end as suddenly as it began. Or it may continue for a long time. A repricing of US paper is an event far less predictable than the exhaustion of an oilfield. Unfortunately, our capital markets don’t seem to know how to price or hedge that kind of risk.

It is nice, in the moment, to be overpaid for something. But I hope we are not overpaid for too long. A resource curse is still a curse.

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paul frijters
paul frijters
16 years ago

its a small thing, but my understanding is that Holland is rich in gas, not oil. Norway got the oil. The Dutch welfare state has been floating on gas and even that is mainly in ‘Slochteren’ and not under the North Sea. Apparently the gas is running out though.
The more substantial point about US financial markets is the immense amounts of US government bonds held by some Asian central banks. Whilst the US is making large returns on its foreign investments, these banks are willingly accepting low returns, which is a direct transfer to the US presumably for geopolitical reasons rather than financial market reasons. Methinks that the day these central banks decide to let the US economy crash by selling off these bonds is the day you dont want to be holding stocks.

Nicholas Gruen
16 years ago

Yes Paul,

The linked post makes that clear. I don’t know why I wrote ‘oil’, as I had a recollection of writing ‘gas’. But I was wrong!

But you’re right.

derrida derider
derrida derider
16 years ago

Yep, the Peoples Bank of China has the US’ testicles firmly in its grasp. And you know what Richard Nixon said – “if you’ve got ’em by the balls their hearts and minds will follow”.

The Yanks have been really slow to realise what this means for their position in the world (we, of course, have been even dumber in tying our fortunes so closely to theirs). Apart from the fact that, at PPP and on present growth rates, Chinese GDP will exceed the US’ within a decade (and military oomph will follow not long after), the US already just cannot afford to seriously cross China on anything. The prospects for Taiwanese independence, for example, are bleak.

16 years ago

I don’t know economics and financial markets at all, so this isn’t a leading question or anything. But if the US economy crashes does this result in a devaluation of the US dollar? And if so, what does that mean for the Chinese economy; it was my outsider’s understanding that the Chinese economy relies on exports to Europe and the US.

Nicholas Gruen
16 years ago

Well Gilmae you may not know economics but you’re onto the main game. That’s the faustian bargain between the Asians and the Americans – the Asians buy US bonds with lousy yields (which are even less when adjusted for the likelihood of devaluation) but that keeps the US motor going and enables the US to buy Asian goods.

Problem is Asia is not a monolith but a bunch of countries. And so what if some get a bit jack of subsidising the others in this way – figures they can free ride by not buying the bonds and enjoying the ride provided by their neighbours. Then we have a problem. Even without this we would eventually have a problem because what’s happening now makes much less sense than an alternative which would involve Asian markets exporting more to each other and consuming more themselves. Then they don’t have the need to subsidise US consumption.