Permanent surplus is as bad as permanent deficit

Only fools and market absolutists [presuming these are separate categories] deny that financial excesses are killing the world economy.  Everyone has their pet theories as to why this is so.  Mine start with a rising tide of hot money roaming the planet at the flick of a few computer keys searching for short term gains.  This started with the vast surpluses generated by the two OPEC price revolutions of the 1970's and has grown from there.

Oil money first: The sums are vast but the problem has largely been dealt with.  The bulk of OPEC [and the other major oil exporters] spend their oil money as fast or faster than they get it.  The major surpluses are the GCC.  They have managed to transition as a whole to rentier nations that invest sensibly, have a stake in the system and at this point decades of experience in managing their wealth.  Also the KSA [the vastly largest GCC producer] increasingly spends its surplus on internal consumption.  The OPEC effect is more regional than global; they run surpluses with the rest of the world to spend in Europe and South Asia.

That leaves the twin problem children: Germany and East Asia Inc.  The German problem is the Euro project.  If Germany had its DM back, its currency would have shot into the stratosphere as the Swissie has.  This would depress exports and boost imports.  Instead the Euro gives Germany a favorable exchange rate at the cost of having to act as piggy bank for a collection of Club Med nations with severe structural and financial problems [Eire is a separate issue].  Europe as a whole has a reasonably balanced economy.  The problem is whether Europe is a whole or a collection of nations.

East Asia Inc. is the piece that will kill the current world system.  The various East Asian nations are not peas in an economic pod.  Chinese mercantilism is significantly different from Japanese which is significantly different from Korean...However net net East Asia runs huge surpluses with the rest of the world.  This gives them a pile of Dollars and Euros which they do not wish to spend.  Instead they want the US and Europe to both perpetually run trade deficits with them [the Asian economies are built around exports rather than internal consumption - there are structural and social reasons for this] while at the same time maintaining the value of their currencies.  These two goals are directly contradictory.  For the US to run consumption at 70% of its GDP it must run accomodative economic policies that require the dollar to continually depreciate.  Except the Asia Inc. nations game the supposed free floating F/X market to avoid dollar appreciation trying to put the entire adjustment burden on Europe which is part of what is killing the Club Med countries.

Essentially the entire world system is broken.  We can wait for a planetary Lehman moment when the entire Atlantic world defaults in a chain reaction or we can begin to divest from a global system that doesn't work into regional blocks that could work.  East Asia, Europe and Anglo North America use words like capitalism, markets etc. but mean different things by them.  An orderly retreat would do the least damage.  However it would require a clear headed look at the current mess which seems unlikely.  So my advice [for whatever that is worth] is to mentally prepare for a financial Armageddon that makes 2008 look like a walk in the park.  Indeed I have a book bet on this.  Will probably lose the bet - I am always better on what than on how fast.  However I was willing to roll the dice.  I can afford to lose a book at Amazon.  Whether the world can afford a total meltdown as the price of facing reality is a scarier notion.