What Shakespeare could tell the G20 summit

All that glisters is not gold – the Gruijters’ find a modern day link between Shakespeare’s The Merchant of Venice and the G20 summit. First published on The Graduate Times.

You may not think William Shakespeare could be useful for imparting nuggets of economic wisdom, but the bard’s tragi-comedy ‘The Merchant of Venice’ could certainly teach the aspiring economist something.

In ‘The Merchant of Venice’, a young suitor, Bassanio, asks a rich merchant Antonio for a loan, as he has fallen in love with the rich Portia, but doesn’t dare to woo her empty handed. Although Antonio has his wealth invested at sea, Antonio is willing to extend a loan to Bassanio by signing a bond with Shylock. Instead of  charging interest, Shylock says that he will take a pound of flesh if the loan is not repaid in time. Antonio thinks this is kindness, but Bassanio suspects Shylock of ulterior motives.

Currently, China, like Shylock, has effectively been lending a vast amount of money to the US consumer, not just for mutually beneficial trade, but for more economically sinister purposes as well; to manipulate the terms of trade. Like Antonio, the US has not cared that much when the weather was fair (the ability to buy cheap goods only makes the Americans richer), but as soon as the storms of crisis have appeared on the horizon much rhetoric has been used to force an appreciation of the Yuan (or Renminbi). Like the pound of flesh, the under valuation of the Renminbi is the real purpose of the build up of Chinese foreign reserves, not the return of the bonds.

As in ‘The Merchant of Venice’ it seems that Shylock or China has total control. Yet like in the contract between Antonio and Shylock (the bond only allows Shylock to remove a pound of flesh, not the “blood”, of Antonio; thus, if Shylock were to shed any drop of Antonio’s blood, his “lands and goods” would be forfeited under Venetian laws) this contract too, has a major flaw; the US could simply turn the printing press on and print so much money as to effectively inflate its way out of the current debt by making the Chinese reserves worth less.

Does this mean that the US will inflate its way out of trouble? Probably not, the mere threat of doing this will inevitably lead to the Chinese selling dollars and allowing the dollar to depreciate against the yuan as the supply on the money market increases.

All monetary authorities should see this same nexus between the creditor and debtor and understand that holding reserves to keep one’s currency “undervalued” may seems a sensible tactic, yet is definitely unsustainable. As in ‘The Merchant of Venice’, the debtor is eventually the winner. A future with limited foreign reserves could then be the eventual outcome of the G20 summit without an official result. This is an outcome the Extended Society and the beautiful Portia would prefer as it encourages mutually beneficial trade, and not the hoarding cash in gold and silver caskets.