Saturday, October 11, 2008, turned out to be a surprisingly memorable day for me. I had been analyzing the financial mess in which the world now finds itself. My reaction was: “This is a really big deal! This is a moment of immense global and historic significance, a pivotal event in world affairs.” In my lifetime, there have been only three events that have struck me immediately and forcibly with their profound significance. In my reaction on October 11, at a relatively early stage in this current drama, I don’t imagine I had too much company. But for me, this was Eye Opener #3.
I had a lot more company back on September 11, 2001. From the unforgettable events of that day, it was immediately obvious that the consequences would be monumental in scope. This was my personal Eye Opener #2. (My Eye Opener #1: the 1967 Six Days War.)
1967, 2001, and 2008
It is useful to trace the links among these events. The Arab-Israeli War of 1967 fueled Arab resentments toward Israel and, more and more, toward Israel’s primary sponsor, the United States. This paved the way for the long ugly “shadow war” of Arab terrorists against the West, but once again primarily against the USA. And an undercurrent of this conflict is the financial struggle between the oil-producing Arab nations and the oil-guzzling West.
On October 24, I heard a financial expert say, “We have witnessed stock market downturns in the past. These are cyclical events. The markets have always rebounded within a couple of years, before soaring to even higher levels. Don’t worry. Be happy. Sit tight.” By this time, I thought it was obvious that this is far more serious than any downturn we have witnessed previously; this involves fundamental, structural upheaval in the worldwide financial order. Evidently not as obvious as I had thought!
But later that day Alan Greenspan, former chairman of the US Federal Reserve, for 18 years the most powerful man in the entire financial world, described this situation as a “once-in-a-lifetime credit tsunami.” The following day the president of China spoke of the urgent need to overhaul the global financial structure.
Iceland, Russia, and foreign exchange reserves
Back on October 9, I had heard that Iceland was in terrible financial shape and was asking Russia for a multi-billion-dollar loan. Why Russia? Because the nation which Iceland calls its “new friend” has the third largest foreign exchange reserves in the world, after China and Japan.
What are foreign exchange reserves? The money, in foreign currencies, earned from selling goods and services to other countries, and stashed away for later use.
Iceland’s “old friends” are in no position to lend money. These countries have insufficient funds to meet their own needs as they attempt to rescue their domestic economies. But Russia, like some Middle Eastern countries, has been accumulating cash by selling oil. Meanwhile, China has been successfully selling massive quantities of manufactured goods. The transfer of wealth from the West to China and the Middle East in recent years is staggering.
External Debt
Another useful measure of a country’s financial health is its external debt. This is that part of a country’s total debt, owed by individuals, companies and governments, to creditors outside the country. Look at the external debt owed by six countries: USA, UK, Germany, France, Italy and Spain. Collectively, this group is approximately $38,000,000,000,000 in the red at their “friendly” foreign lenders. That is $38 trillion! And among themselves, they have on hand only $1.2 trillion in total foreign exchange reserves. In other words, these Western nations owe about 30 times more than they have available to lend!
Meanwhile, China and Russia, together, have twice as much foreign currency tucked away in their “savings accounts” — about $2.4 trillion. And their combined external debt is less than $750 billion. That’s only 3/4 of a trillion dollars compared to the six nations’ 38 trillion. In other words, they owe 1/50 of what the Western nations owe!
Some simple math
Let’s reduce this to some simple numbers. Some years ago US Senator Everett Dirksen famously said, tongue in cheek, “A million here and a million there, and pretty soon you’re talking real money!” His point was: we need to have numbers that mean something to us personally before we can truly understand.
Let’s reduce all the numbers above by a factor of $1 billion; in other words, let’s lop off nine zeroes. Here’s what we have (all figures are approximate):
| Nations | Foreign exchange reserves(What they have) | External debt What they owe) |
“Cash on hand” as a percentage of debt |
| 1. USA, UK, Germany, France, Italy, and Spain | $1,200 | $38,000 | 3% |
| 2. China & Russia | $2,400 | $750 | 320% |
Think of it this way: If you needed to borrow, say, $100 until payday, whom would you ask for a loan? Friend #1, who has a mountain of debt that he can’t afford? Or “Friend” #2, who has in ready reserve several times more money than he owes?
Economic power is the key
In the real world, economic power has always been the cornerstone of all other power, whether political or military.
For decades, most of us in the West have enthusiastically adopted the philosophy of “Buy now; pay later.” We did so both collectively and individually. ‘Later’ seems to have arrived. And the payment process could be exceedingly painful.
As goes America’s economic strength relative to its competitors, so will go its political and diplomatic influence, and eventually its military power. Consider one outcome of this gradual shift of power and influence from West to East: humanly speaking, the very survival of the nation of Israel has depended almost entirely on the support of the USA. How do you suppose China (never mind Russia) views this tiny nation? At best, with indifference.
We might well ask: with all its financial woes, how long will it be before the United States cannot sustain its military presence in the Middle East, or its position as implicit protector of Israel? One day, the military consequences of the financial disparity outlined above could prove earthshaking!
The Origin of the Organic World – Part One