What to make of sovereign debts

I was told that developed countries in 2009 issued US$12 trillion worth of bonds. It is hard to imagine what this $12 trillion means. Sometimes numbers are so large that they become meaningless because we simply cannot grasp what they mean. At US$1,100 per ounce, one trillion USD buys 25,000 tons of gold. Well 12 trillion buys 300,000 tons of gold! But this comparison is meaningless as most of us do not deal in gold except for a few petty grams of gold trinkets here and there. Let us put this 300,000 tons in perspective. The annual gold production from mines is about 2,400 tons . Developed countries have issued money worth 125 years supply of gold in just one year!

The value of gold can be seen from this simple example. Gold supply is 2400 tons per year but money supply in just 2009 is equal to 300,000 tons or 125 times the annual gold output from all mines. If paper currencies from developed countries multiplies 125 times faster than gold , what do you think will be the value of gold relative to paper currencies?

Interestingly this time the debt is not issued by developing countries but by developed countries with matured economies and presumably run by matured finance ministers. This incredible amount of debt will mean either the countries have to increase taxes, reduce spending or simply print more money. The last alternative seems to be politically the most attractive. When countries issue fiat money in large quantities, inflation will rear its ugly head.

Here is what I believe will happen . Asian currencies or those countries will less debt will have their exchange rates increased relative to those countries with huge debts. Some may think Asian Governments will keep their exchange rate low in order to remain competitive but to do so will be to invite inflation into their own countries. The only way to retain an exchange rate is to follow your neighbours. If the print money, you simply have to follow suit. There will be a period of confusion , of fear but eventually everyone will settle on USA dollar being on par with a Singapore dollar and one Sterling pound is below one Singapore dollar. It is basically a simple arithmetic equation. The more money one prints, the lower the value of that money!

China will at last increase the exchange rate of the yuan vis a vis the US dollar when she realises that she will remain competitive even though the yuan appreciates 50% or even 100%! Manufacturers in USA and Europe are ten to twenty times less cost effective than a China manufacturer and so even a 100% increase in the yuan vis a vis the US dollar will not affect China's competitiveness. If all Asian and BRIC countries currencies appreciates in tandem, China's competitiveness will not be affected.

What will happen is that consumers in Asia and BRIC countries will feel "rich' and this will trigger a consumer boom for Western products. What happens is an exchange of goods by different sets of consumers. Low and middle class Americans and Europeans will buy cheap goods from China while affluent Chinese will buy luxury goods from the West. There will be more tourists from Asia visiting Europe and USA and hence a more equitable world economy will ensue.

Now it is like a person having a severe tummyache. He needs to vormit out the poison in order to feel better. Asia must be brave and accept a higher exchange rate for future stability and not be fearful that higher exchange rates will make their exports uncompetitive. Get the poison of low echange rates out of the way. My wife bought a rechargeable torchlight from China for S$2.00. There is absolutely no way any one in Europe or USA can make that torchlight for S$4.00 or even S$10.00. So let us not worry about high exchange rate and allow our currencies to appreciate and enjoy life! We can have cheaper US steaks and French wine so let's be sensible and do what needs to be done