Niall Ferguson discusses the critical imbalances between East and West that we have pondered often in this space:

France, Britain, America: each had its era of hegemony. But now? They collectively account for more than a third of global output, it’s true. But by 2050, according to Goldman Sachs, their share could be as little as 15 per cent. Their already trivial share of global population could dwindle further, from 6.5 to 5.9 per cent.

The real problem, however, is that they all belong to the club of developed debtors, with combined current account deficits of $970 billion last year. Other members of this club are Australia, Greece, Iceland, Ireland, Italy, New Zealand, Portugal and Spain. Apart from Iceland, it reads like a list of ex-empires, with the former members of the British Empire (energy-rich Canada excepted) in the lead.

Collectively, the developed debtors had to borrow around $1.3 trillion last year in order to finance the gap between their spending on imported goods and services and their earnings from exports, and the gap between their payments to foreign lenders and their earnings from overseas investments. On the other side of this great global equation is the club of emerging exporters. According to the International Monetary Fund, more than 40 per cent of the developed debtors’ funding requirement last year was met by China, Russia and the Middle East.

The problem for the deficit countries is essentially that their people want to live beyond their means. Accustomed to positions of power, they think the world owes them a living. Their politicians pander to this assumption by making a series of more or less incompatible promises: that expenditure on healthcare and education will always go up; that direct taxation will never go up; and that the assets against which voters borrow will never go down. The only way to fulfil these promises is to pump out ever more pieces of printed paper: banknotes, bills, bonds, shares, asset backed securities, collateralised debt obligations and all the rest. The emerging exporters buy these, not least to prevent their own currencies from appreciating against ours. The net result must be a creeping transfer of financial ownership from West to East.

This process is about to enter a new phase as China establishes its own sovereign wealth fund, to join those already operated by the likes of Kuwait, Abu Dhabi and Singapore. According to Morgan Stanley, SWFs currently manage about $2.6 trillion, more than the $1.7 trillion run by hedge funds. A further $4.4 trillion is held in sovereign pension funds. By 2011, SWF assets under management could exceed the total foreign exchange reserves held by all the world’s central banks. And in just 15 years their assets could reach $27 trillion, giving them control of nearly a tenth (9.2 per cent) of total global financial assets.

It is becoming increasingly evident that the West must get its financial house in order. The current situation is unsustainable. Alas, there would appear to be even less political will to address this issue than there is to speak clearly about the great ideological struggle of our time.

This entry was posted on Sunday, October 7th, 2007 at 4:21 pm and is filed under China, Democrats, General, Republicans, business, idiots!. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.