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Date: Wed May 26 2010 - 02:15:51 EDT
..The grasshoppers and the ants – a modern fable
By Martin Wolf
Published: May 25 2010 20:33 | Last updated: May 25 2010 20:33
Everybody in the west knows the fable of the grasshopper and the ant. The
grasshopper is lazy and sings away the summer, while the ant piles up
stores for the winter. When the cold weather comes, the grasshopper begs
the ant for food. The ant refuses and the grasshopper starves. The moral of
this story? Idleness brings want.
Yet life is more complex than in Aesop’s fable. Today, the ants are
Germans, Chinese and Japanese, while the grasshoppers are American,
British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers
want to buy. The latter ask whether the former want something in return.
“No,” reply the ants. “You do not have anything we want, except,
maybe, a spot by the sea. We will lend you the money. That way, you enjoy
our goods and we accumulate stores.”
Ants and grasshoppers are happy. Being frugal and cautious, the ants
deposit their surplus earnings in supposedly safe banks, which relend to
grasshoppers. The latter, in turn, no longer need to make goods, since ants
supply them so cheaply. But ants do not sell them houses, shopping malls or
offices. So grasshoppers make these, instead. They even ask ants to come
and do the work. Grasshoppers find that with all the money flowing in, the
price of land rises. So they borrow more, build more and spend more.
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The ants look at the prosperity of grasshopper colonies and tell their
bankers: “Lend even more to grasshoppers, since we ants do not want to
borrow.” Ants are far better at making real products than at assessing
financial ones. So grasshoppers discover clever ways of packaging their
grasshopper loans into enticing assets for ant banks.
Now, the German ant nest is very close to some small colonies of
grasshoppers. German ants say: “We want to be friends. So why do we not
all use the same money? But, first, you must promise to behave like ants
forever.” So grasshoppers have to pass a test: behave like ants for a few
years. The grasshoppers do so and are then allowed to adopt the European
money.
Everyone lives happily, for a while. The German ants look at their loans to
grasshoppers and feel rich. Meanwhile, in grasshopper colonies, their
governments look at their healthy accounts and say: “Look, we are better
at sticking to the fiscal rules than ants.” Ants find this embarrassing.
So they say nothing about the fact that wages and prices are rising fast in
grasshopper colonies, making their goods more expensive, while lowering the
real burden of interest, so encouraging yet more borrowing and building.
Wise German ants insist, gloomily, that “trees do not grow to the sky”.
Land prices finally peak in the grasshopper colonies. Ant banks duly become
nervous and ask for their money back. So grasshopper debtors are forced to
sell. This creates a chain of bankruptcy. It also halts construction in the
grasshopper colonies and grasshopper spending on ant goods. Jobs disappear
in both grasshopper colonies and ant nests and fiscal deficits soar,
especially in grasshopper colonies.
German ants realise that their stores of wealth are not worth much since
grasshoppers cannot provide them with anything they want, except for cheap
houses in the sun. Ant banks either have to write off bad loans or they
must persuade ant governments to give even more ant money to the
grasshopper colonies. Ant governments are afraid to admit that they have
allowed their banks to lose the ants’ money. So they prefer the latter
course, called a “bail-out”. Meanwhile, they order the governments of
the grasshoppers to raise taxes and slash spending. Now, they say, you must
really behave like ants. So the grasshopper colonies go into a deep
recession. But grasshoppers still cannot make anything ants want to buy,
because they do not know how to do so. Since grasshoppers can no longer
borrow, to buy goods from ants, they starve. The German ants finally write
off their loans to grasshoppers. But, having learnt little from this
experience, they sell their goods, in return for yet more debt, elsewhere.
As it happens, in the wider world, there are other ant nests. Asia, in
particular, is full of them. There is a rich nest, rather like Germany,
called Japan. There is also a huge, but poorer, nest called China. These
also want to become rich by selling goods to grasshoppers at low prices and
building up claims on grasshopper colonies. The Chinese nest even fixes the
foreign price of its currency at a level that guarantees the extreme
cheapness of its goods. Fortunately, for the Asians, or so it seems, there
happens to be a very big and exceptionally industrious grasshopper colony,
called America. Indeed, the only way you would know it is a grasshopper
colony is that its motto is: “In shopping we trust”. Asian nests
develop a relationship with America similar to Germany’s with its
neighbours. Asian ants build up piles of grasshopper debt and feel rich.
Yet there is a difference. When the crash comes to America and households
stop borrowing and spending and the fiscal deficit explodes, the government
does not say to itself: “This is dangerous; we must cut back spending.”
Instead, it says: “We must spend even more, to keep the economy
humming.” So the fiscal deficit becomes enormous.
This makes the Asians nervous. So the leader of China’s nest tells
America: “We, your creditors, insist you stop borrowing, just as European
grasshoppers are now doing.” The leader of the American colony laughs:
“We did not ask you to lend us this money. In fact, we told you it was a
folly. We are going to make sure American grasshoppers have jobs. If you do
not want to lend us money, raise the price of your currency. Then we will
make what we used to buy and you will no longer have to lend to us.” So
America teaches creditors a lesson from a dead sage: “If you owe your
bank $100, you have a problem; but if you owe $100m, it does.”
The Chinese leader does not want to admit that his nest’s huge pile of
American debt is not going to be worth what it cost. Chinese people also
want to go on making cheap goods for foreigners. So China decides to buy
yet more American debt, after all. But, decades later, the Chinese finally
say to the Americans: “Now we would like you to provide us with goods in
return for your debt to us. Thereupon, the American grasshoppers laugh and
promptly reduce the debt’s value. The ants lose the value off their
savings and some of them then starve to death.
What is the moral of this fable? If you want to accumulate enduring wealth,
do not lend to grasshoppers.
More columns at www.ft.com/martinwolf
Read and post comments at Martin Wolf’s blog
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