October 28, 2008

  There are many amateurs declaiming the end of the US financial system, the collapse of the dollar as a currency, the rise of an alternative Eurasian economy, etc.

  The reality is, there remains one crucial feature that the BRICOPEC nations do NOT have that the US has:

Property Rights

  Without property rights, all assets are, in effect, at risk of expropriation at all times.  This means that credit based upon these assets must demand a higher risk premium, thereby nullifying it's potential as a reliable source of collateral.

  What is a good discount rate for Russian real estate?  20%?  50%?  It depends on the dictator du jour (not de juria ).  If you make the wrong man angry, you may get "shish" for it!

  Hence the reluctance of the Chinese to really open up their economy and privatize property:  they will lose control of the wealth of these peasants, and as such, the Central Committee may not be able to coerce them into working $1/day jobs exporting chotchkis to besotted and happy Americans like I am.

  The reality is, these emerging economies will sacrifice economic strength for consolidation of power.  The US, having a stable political system, transparent and reasonably effective courts(comparitively, of course!), and a massive appetite for goods, must be satisfied so long as BRICOPEC fails to establish and respect Property Rights in their countries.

  Without property rights, there is no sovereign credit, and that means the USD remains sans pareil.

  Who needs property when you control the global reserve currency...