If US Loses Economic Stability, so Will the World

Wednesday, 29 Jun 2011 12:09 PM

By Robert Wiedemer

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Although the U.S. may be less important as a driver of world economic growth than it was 20 years ago--China has obviously grown substantially and Europe has grown as well—it is absolutely the fundamental driver of world economic stability.

An example of that came last week when the Fed quietly extended its lending program to European, Canadian and Japanese central banks. Under this program, central banks can get loans in dollars from the Fed to give to their nation’s commercial banks. At the peak of the financial crisis, the Fed lent out more than $600 billion to other government’s central banks under this program.

The reason the Fed extended its lending program is to help commercial banks around the world to weather any storm created by Greece not passing its austerity program this week and thus triggering a default on its massive debts. The Fed is concerned, as are many investors, that such a default would trigger waves of financial problems around the world.

The power to lend such vast amounts of money to other central banks is part of the reason we are the driver of world economic stability.
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However, the other reason is that our government debt is so massive and so widely held that it is terribly important to the world economy. Our stock market is also a bellwether and leader of other stock markets. When our market crashes, so do the world’s stock markets.

Look at the price charts for the world’s stock markets and see how similar they are to the US in 2008 and 2009. Finally, our leadership in financial stability is not only due to our size, but our track record. The US has been a pinnacle of financial responsibility for most of its history.

But don’t mistake this power to borrow and print money for real stability. In fact, it is the foundation for real instability. The surest way to lose such power is to abuse it time and again.

Recently, we have relied far too much and far too often on our government’s enormous power to borrow money and to print money to provide economic growth and stability. We are abusing this power and when we lose it, we and the rest of the world will suffer mightily.

If Greece’s debt was accumulated because of sound investments in its economy that will surely pay off, then bailouts are not only warranted, but smart. But Greece’s debt isn’t due to smart investing, it’s not even due to investing, it’s due to overspending. These are bad debts from beginning.

If our own government’s overspending and our financial asset bubbles were fundamentally sound, bailing out the financial bubbles and our government with massive borrowing and printed money might make sense. But, they are not sound. Instead, our bailouts aren’t based on hard-nosed investment analysis, but on simply turning a blind eye to massive financial irresponsibility on the part of the government and our financial markets.

As long as we can print money without creating inflation, we are fine.

We can continue to be the driver of economic stability because we can print whatever it takes to bail out whomever and whatever is needed.

But when that printing creates significant inflation, watch out. Our power to create world financial stability will shortly come to an end.

Bottom Line: The U.S. is the driver of world economic stability. As long as we are stable, the world will have some level of economic stability. But once we lose our stability, no one in the world will have economic stability.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $120 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
 

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