Got you by the Bonds

When you have the money, you don't need guns to manipulate a country.

That was the claim I made in my last post. I wasn't going to go into detail because frankly these posts always seem to go on a lot longer than I anticipate. I guess argument just takes time.

However since China appears to be helping out the EU by giving us money, it actually seems like a prime opportunity to explain why having huge amounts of debt to another country is really concerning.


To begin I'm afraid we need a brief history lesson. The scene is post war Europe. The UK hasn't gone into the EU, because we didn't need to. Europe has huge debts to the US because after the war Europe had spent every penny it had trying to kill off Nazism. Britain and Germany had practically destroyed themselves in a fight for supremacy, while in the mean time, for most of the war, the US was happy to take over the trade the Britain was unable to serve because it was too busy trying to save Europe from the Nazis.

Not exactly America's proudest moment, but in fairness it was American citizens who didn't want to get involved in another costly war and no one knew about the holocaust until later.

Anyway, after the war the US bought huge sums of British bonds in order to give the UK the money to rebuild itself and get back on track. Largely it had.

So that is the scene. Now Egypt decides that it is going to take over the Aswan Dam, a French and British owned structure. The British and French unsurprisingly don't find this amusing. They launch a military invasion and sort the matter out within 5 minutes. Militarily Egypt was not a challenge for countries that knew how to fight.

So far, so straight forward, so where does the debt come in? Well at this point its 1956 the cold war between the Soviets and the US is going on... by cold of course we mean there was no war, there were just two countries (the USSR and the US) getting ready to beat each other into the stone age should war actually break out.

Egypt was doing a fine job of playing the two countries against each other. It went to the US for weapons, they said responsibly... fine but only if you're trained and supervised by US personel, the Egyptians didn't fancy that, so they went to the Soviets instead who said "sure, whatever you want, if you've got the money (or even if you don't) we've got the guns. Egypt also recognised China too a new communist state even though the US really didn't want this to happen, so all in all Egypt was doing a great job at playing the two off each other.

So you can imagine how wary the US was when two of its biggest allies went in and started kicking in Eygpt like an annoying little brat who isn't giving respect to the sixth formers.

The US feared that the USSR would come in to help Egypt and before you know it the cold war would turn very very hot. Bear in mind we are talking WWIII with nuclear weapons hot.

So the US told the UK and France to back off. Of course, Britain, like a good independent country would, told the Yanks to jog on and get on with their own business. Now if there was no debt, chances are, that is where the story would have ended. Possibly the US would have paid both the UK and France the cost of the Dam and quietly they would have left Eygpt with some excuse about respecting national autonomy or some other rubbish.

But the US didn't need to do that. It had bought all our bonds, remember? It just said to the UK, get out of Egypt or we'll sell all the bonds we own in the UK government. In doing so supply would have shot up, while demand stayed the same. The price of our bonds would have plummeted, the pound would have dropped like a stone and our economy would have collapsed. So perhaps unsurprisingly, we got out.

How embarassing. Annoying behaviour from the Yanks, but understandable when you consider what the cold war was about; essentially stopping the world from wiping itself out.

So that is the end of the history lesson. Well actually the true end of the story is that after this the UK joined the EU, obviously annoyed that there was the potential for foreign powers to interfere with its policies, it thought the best thing to do was to get into a bigger gang to look after its interests. Personally I don't see how taking orders from the EU is any better than taking orders from the US, in fact, I'm confident it is worse.

Back to China and today; I'm guessing you get my point. China is now buying bonds in the European Financial Stability Facility. Hmmm, do you see a pattern here?

Of course China has its own benefits from loaning Europe money. Europe is the country buying its products in the first place so if Europe goes down, so does their Export economy. Also as long as the amount of Debt owned by China remains low over all their influence will remain limited. But with the papers suggesting it could be as much as £62,000,000,000 that is a little concerning.

(see http://www.independent.co.uk/news/world/europe/china-holds-europe-to-ransom-over-16362bn-bailout-deal-2377396.html
http://news.xinhuanet.com/english2010/indepth/2011-10/30/c_131220069.htm)

Either way though it just seems to signal a worrying desperation to keep the EU afloat. Surely a lot of people are wondering why it is such a good idea to keep borrowing money, rather than letting those who are going to go under, go under.

Sure lots of countries would be bankrupt initially. Money would be lost and there would be problems. But then instead of borrowing to finance borrowing money could be spend investing. Lots of companies would become worthless and their assest can be bought by companies that are doing well and want to expand. Businesses that are efficient could borrow money and invest it, instead of governments borrowing money just to spend on interest payments. It would allow the system to re-settle itself with the companies that made mistakes dying off and those that didn't being in a better and stronger position than before... I'm willing to accept that I'm not certain about this, but I can't help but get the feeling all this borrowing is just postponing the inevitable.

Part of the problem is that we're too used to having what we want. We think that because we live in the West we're entitled to have the best of everything and the rest of the world is another matter.

In reality the West only ever had all it had because of a work ethic and a level of morality that meant you worked hard, didn't cheat and you weren't corrupt. Even now thankfully the level of corruption in the UK is way lower than in China. But I doubt that is going to stay the same. After all it is no surprise to me that the wealthiest areas of China are usually those that have the highest Christian populations, and a true Christian (I imagine a fake one is pretty rare in a country where it draws adverse attention from the authorities and can land you in jail) isn't likely to behave in a corrupt manner. This combined with the exploding Christian population in China at the moment means it is likely that corruption is going to decrease.

But while we're not too corrupt, areas of the West do not have the right work ethic. When the banks went under, people still refused to give up their bonuses. What sort of work ethic is that? You and your team fail so badly you send your country into crisis and you're still not willing to give up your bonus? What? If I was the government minister responsible I would have fired them on principle. I don't know where they think they are going to get new jobs when they have just made such a hash of their previous one.

Anyway, I digress, my concern is, with that sort of attitude in the West and the increasing efficiency of the East, that predicts storms coming our way, regardless of who has got us by the bonds.

The one thing that is likely however, the moment that problems do come, it may be that we start to sort ourselves out, moving away from materialism and more towards family and community... one can hope eh!