Hi DJ - hope you won't get mad about me bringing up the Great Depression again, but this, I think, is relevant to the argument that the US boom was financed by foreign money.
I was going to send you this as a PM but thought maybe some people on the thread might have some insight. You know I am interested in the large amount of foreign loans to Germany during the 1920's (24 billion DM in 1931 when the DM was 4 to the dollar, and US GDP was about 100 billion dollars and German Gross National Income was around 50 billion DM), mostly in the form of bonds subscribed to by US investors (many of German heritage), and how the Germans repaid the loans by floating new ones, and how they used the money to pay reparations to France and Great Britain, and how France and Great Britain used the reparations to pay back money they borrowed from the US to finance WWI, and how the US quit loaning money to Germany in 1928-1929, which tipped Germany into the Depression, and caused Germany to default, possibly setting off the entire chain of financial events that we call the Great Depression.
I just came across some interesting data. According to Stephen A. Schuker, Dietmar Keese calculated that the net capital inflow of foreign money to Germany, after subtracting reparations payments, from 1925-1930, was 17.5% of German gross domestic investment. C.R.S. Harris calculated that long-term capital provided by foreigners accounted for 18.7% of all stocks, bonds, and mortgages issued in Germany from January, 1924 through April, 1929. Carl-Ludwig Holferich and Karl Erich Born demonstrated that foreigners provided 36% of German bank deposits in 1919-21 and 38% in 1929.
What was the money used for? Not just stocks and mortgages, but cities and states floated bonds to pay for nice things that the taxpayers wouldn't pay for, like "aesthetically designed public buildings and green spaces, sleek subways and soaring bridges, tasteful flats and swimming pools for the masses, opera houses and concert halls for the classes. . . . . To finance their ambitions, they tapped every till - at home, abroad, even in publicly owned savings banks whose liquidity they undermined, operating seemingly on the principle attributed to the bank robber Willy Sutton, who plied his trade where he did because that's "where the money was."
Kind of eerie parallels to the US. Cut taxes, borrow money. I was reading recently - forgot where - that the entire US expansion since 1987 has been financed primarily by cheap money borrowed from Japan - which I guess would let the Fed off the hook.
BTW, I said I would try to get a handle on US bagholders. In 1935, 600,000 Americans owned defaulted foreign bonds, average amount $3000. That's $1.8 billion. |
