← Autodidact Archive · Original Dissent · Hugh Lincoln
Thread ID: 17599 | Posts: 23 | Started: 2005-04-01
2005-04-01 18:16 | User Profile
Who, exactly, holds this "deficit"? This isn't a debt, right? And why does it make the dollar weak?
2005-04-01 18:57 | User Profile
[QUOTE=Hugh Lincoln]Who, exactly, holds this "deficit"? This isn't a debt, right? And why does it make the dollar weak?[/QUOTE]I think the more accurate term is the current account balance: the difference between the amount the US gives to foreigners (generally, in exchange for imported goods) and the amount foreigners give to the US. Currently, the US spends more overseas than foreigners spend here, so the current account balance is negative, a deficit. Most of the deficit is held by Far East and Middle East central banks.
The effect on the dollar is pure supply and demand: as we print up and shovel ever more dollars out the door, demand for the dollar falls. The dollar should be falling even further, but foreign central banks obligingly mop up dollars to keep the supply in check and support their export-driven economies. For the most part, these dollars are then used to purchase US Treasury bonds and other dollar-denominated debts.
Obviously, at some point it will be more expensive to hold dollars than not, and the US's monetary equivalent of a game of "chicken" with the rest of the world will be over.
2005-04-01 19:14 | User Profile
[QUOTE=SteamshipTime]I think the more accurate term is the current account balance: the difference between the amount the US gives to foreigners (generally, in exchange for imported goods) and the amount foreigners give to the US. Currently, the US spends more overseas than foreigners spend here, so the current account balance is negative, a deficit. Most of the deficit is held by Far East and Middle East central banks.
The effect on the dollar is pure supply and demand: as we print up and shovel ever more dollars out the door, demand for the dollar falls. The dollar should be falling even further, but foreign central banks obligingly mop up dollars to keep the supply in check and support their export-driven economies. For the most part, these dollars are then used to purchase US Treasury bonds and other dollar-denominated debts.
Obviously, at some point it will be more expensive to hold dollars than not, and the US's monetary equivalent of a game of "chicken" with the rest of the world will be over.[/QUOTE]
Why do I get this image of a snake eating its own tail?
[img]http://www.badalijewelry.com/images/snake03016.jpg[/img]
2005-04-01 19:54 | User Profile
I have been round and round on this, because I honestly don't know what is keeping all the balls in the air. Implicity if not explicitly, US policy makers have declared their intention to inflate the debt away.
I think it's because the US is the largest market and still has incredible productivity, even with all the government externalities weighing us down. Dollar holders are betting that the US economy will continue to outpace all others. (As I'm sure you know, this is no longer a sure bet.)
At the same time, there's a lot of psychology involved, like the bank that's owed a billion dollars and doesn't dare foreclose. For example, if it were almost any other business, General Motors' creditors and shareholders would have handed out the pink slips, changed the locks and hired an auctioneer. They can't because the resulting devaluation of the GM stocks and bonds they hold would destroy their own balance sheets, and their creditors' and shareholders' balance sheets, and etc.
A colleague was the source for a good, pithy saying: Eventually, something that is said to be too big to fail gets too big not to fail.
2005-04-01 23:22 | User Profile
Japan, China, India and so on have billions and billions of US fiat in the form of bonds, now then.....they are using those bonds as collateral in order to buy oil, gold, fuel and so on, so......what is the "final destination" for all those bonds? and who ever end up with them what will they get for those bonds from the US?
This is a quiestion that I have asked five time and still I am not happy with the four previous answer because they make no sense to me.
To my simple mind if I give out an IOU for five dollars or sign a check it means that I have something to back it up even if it is cash in the bank.
WHAT DOES THE USA HAS TO BACK UP ALL THOSE BILLIONS OF DOLLARS? OR WHAT WILL THEY GIVE TO THOSE WHO WILL COME TO US WITH ALL THOSE BONDS?.....The way I see it WE ARE IN TROUBLE.
2005-04-02 01:09 | User Profile
[QUOTE=Ponce]To my simple mind if I give out an IOU for five dollars or sign a check it means that I have something to back it up even if it is cash in the bank.
WHAT DOES THE USA HAS TO BACK UP ALL THOSE BILLIONS OF DOLLARS? OR WHAT WILL THEY GIVE TO THOSE WHO WILL COME TO US WITH ALL THOSE BONDS?.....The way I see it WE ARE IN TROUBLE.[/QUOTE] As far as I can tell we have two things: the promise of future productivity, and the fact that we import a -lot- from the Asian countries that hold most of our debt. I guess it's like giving someone an IOU and saying, "Sure I'm good for it, look at how much money I make. And just to say thanks, I'll introduce you to a bunch of people you can sell your trinkets to..."
2005-04-02 03:21 | User Profile
Future "productivity"? The only thing that the US produces now is paper work and war and neither one helps the American people.
2005-04-02 04:35 | User Profile
The US once was a net exporter of food. But, I think that has finally changed after decades.
Eventually, other countries will start to conclude that the American dollar is worthless and that they shouldn't even finance the US debt because America is noting going to continue to have the ability to repay the debt. America still has a lot of psychological capital that keeps the dollar afloat. But, it could pop like a bubble.
2005-04-02 14:21 | User Profile
Thanks guys but that dosen't give me the answer that I am looking for, so one more time.
[B]When those holding all those US bonds come to us in order to cash them what will the US give them in return for those bonds????????[/B]
Come on people I know that someone out there knows the answer
2005-04-03 02:59 | User Profile
Holy Molly, something else, those bonds do collect interests,no? so what are they gettin in interests? anyone knows? and they get what in interest? more bonds?.
I am a no brainer but I do know when someone is getting the shaft, the only thing is that I am not sure who is it. Or maybe I do know but I don't want to think about it.
2005-04-03 12:49 | User Profile
[QUOTE=Ponce]When those holding all those US bonds come to us in order to cash them what will the US give them in return for those bonds???????? [/QUOTE]They will issue a check for the amount of the bond, plus interest--money out of thin air. The check will eventually be presented to a Federal Reserve bank for payment. Depending on what the payee wants, the Fed will either pay out newly printed money or credit the payee's account. Like any other bank, the Fed then debits the USG's account. The USG account has been overdrawn each year for many years (the deficit). The USG then directs the Treasury to hold an auction of notes to cover the annual deficit (the national debt). I have read in the WSJ that there are auctions at which 2/3 of the debt remains unsold. The Fed carries the USG anyway: the banking cartel's payoff to the USG in exchange for protection from bank runs.
Like I said, I don't know what's keeping all the balls in the air. Some have claimed that the vast tracts of resource-rich public lands held by the government are collateral for the debt.
2005-04-03 17:38 | User Profile
Thanks Steamship, that tells me one thing and that is that it will be to the benefit (they will have no choice) of the US to declare chapter 8, 11 and any other bankrupsy law that there is for international matters, something like Argentina?
By telling the world to get f**k the US will be telling the American people the same thing, boy oh boy [B]are we in trouble[/B].
That must be one the reason as to why the US is taking the war outside the US, in order to set up a perimeter of defence.
I would like to talk more about this because I feel that it is very important to do so but I wont do it because I don't know enough about this matter and besides.....what else is there to say? WE ARE IN TROUBLE.
2005-04-12 19:02 | User Profile
[QUOTE=SteamshipTime]I think the more accurate term is the current account balance: the difference between the amount the US gives to foreigners (generally, in exchange for imported goods) and the amount foreigners give to the US. Currently, the US spends more overseas than foreigners spend here, so the current account balance is negative, a deficit. Most of the deficit is held by Far East and Middle East central banks.
The effect on the dollar is pure supply and demand: as we print up and shovel ever more dollars out the door, demand for the dollar falls. The dollar should be falling even further, but foreign central banks obligingly mop up dollars to keep the supply in check and support their export-driven economies. For the most part, these dollars are then used to purchase US Treasury bonds and other dollar-denominated debts.[/QUOTE]
OK, so it's the difference between how much stuff we buy from foreign countries and how much stuff they buy from us. But I wonder what that measures, aside from our own apparent lesser productivity. Is it that we're better off as sellers?
And I guess I don't see the monetary connection: If we use U.S. dollars to buy foreign goods, how does that decrease the power of the dollar? I can see how the value of the dollar would fall if we printed up twice the cash we have now (inflation), but what does it matter where it's spent?
2005-04-12 19:12 | User Profile
[QUOTE=SteamshipTime]I have been round and round on this, because I honestly don't know what is keeping all the balls in the air. [/QUOTE]
A lot of it is the dollar's status as the world's reserve currency.
There are gazillions of dollars ciculating all over the world since most international trade among all countries is denominated in USD.
If that changes - say, but Russia denominating oil contracts in Euro - then the jig will be up, everybody will dump USD and the dollar will nosedive.
2005-04-12 22:18 | User Profile
[QUOTE=Hugh Lincoln]OK, so it's the difference between how much stuff we buy from foreign countries and how much stuff they buy from us. But I wonder what that measures, aside from our own apparent lesser productivity. Is it that we're better off as sellers?[/QUOTE] International trade and currency is a weak area for me, and I'm a little over my head on this. Anyhoo,
There is really nothing wrong with a trade deficit per se. After all, you run one with your grocery store. However, you also generate sufficient revenue from your own productivity so that your books balance: you take in at least as much in revenue from your clients as you give to your grocer. As I understand it, the US's books don't balance. The current account deficit is an indication of this. The money we give to foreigners has to come from somewhere: our own production, fiat, or credit. If it came from our own production, then the books would show we sold as much to foreigners as they bought from us.
And I guess I don't see the monetary connection: If we use U.S. dollars to buy foreign goods, how does that decrease the power of the dollar? I can see how the value of the dollar would fall if we printed up twice the cash we have now (inflation), but what does it matter where it's spent?
Again, I believe it's simply that dollars that had previously been in circulation in the US are now circulating in the rest of the world. The global supply of dollars has increased.
2005-04-12 23:49 | User Profile
"A lot of it is the dollar's status as the world's reserve currency. There are gazillions of dollars ciculating all over the world since most international trade among all countries is denominated in USD. If that changes - say, but Russia denominating oil contracts in Euro - then the jig will be up, everybody will dump USD and the dollar will nosedive." - Walter Yannis
Hello Walter
The US has deliberately being devaluing the dollar in order to stimulate domestic growth. This policy hurts the EU's exports the most and makes European goods seem to be uncompetitive. The EU is now calling China in for undermining it's exports and this is what the US wants. The EU is China's major Western trading partner and together with the US may be able to pressure the Asians to allow there currency to appreciate.
The EU has a economy the size of America's however it also has extremely high levels of social spending to maintain. In Britain not only is taxation out of control (largely due to immigrant, housing, education, health care and a aging population) but incomes levels are actually falling. France and Germany on the other hand continue to have high levels of unemployment.
The US and China are the worlds largest oil consumers. A devalued dollar means the US pays less for oil in real terms 'deflation' and lowers it's current account deficit repayments.
As has been already pointed out. The Asians have export driven economies and are as a consequence forced to continually buy the bulk of the US's debt.
China however is manipulating their currency's value.
China's currency is said to be undervalued by as much as 40 percent.
China pegs the yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. In order to maintain the yuan's fixed value, China must create a residual supply of yuan to counter growing demand for its currency; China achieves this by buying dollars in foreign exchange markets. In essence China dumps it's yuan and then trades goods and commodities in dollars.
Greg
2005-04-13 00:36 | User Profile
Yes - China is the main culprit in this thing.
But isn't this an irrelevant issue? Trade deficit, Sh-made deficit. There will be no handing over of land as "collateral" and such. We are the world's #1 military and in the end, that's what will make the difference.
There will be no economic collapse IMO - b/c we'll shoot anyone who gets in the way. Do you know what happens when people try to re-po cars in the hood?
Yeah: they DO owe the money. But.....
2005-04-13 07:10 | User Profile
[QUOTE=Gregz]"China however is manipulating their currency's value.
China's currency is said to be undervalued by as much as 40 percent.
China pegs the yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. In order to maintain the yuan's fixed value, China must create a residual supply of yuan to counter growing demand for its currency; China achieves this by buying dollars in foreign exchange markets. In essence China dumps it's yuan and then trades goods and commodities in dollars. [/QUOTE]
I agree with that.
Some corporate libertarian types snicker and say "well, so we're sitting here with Chinese clothes and gadgets, and the Chinese are sitting over there with overpriced dollars."
But that, while true in a sense, misses China's larger strategic game. China looks at this from a very broad historical perspective. China wants hegemony, and that means challenging America. That means that China must industrialize itself, and if possible by simultaneously de-industrializing the United States. That's because power grows from the muzzle of a gun, and because guns grow from industrial economies. It follows that removing America's industrial ability while developing its own advances China's hegemonic goal and thus is the name of the game.
From China's perspective it matters little that it's not getting paid full value for its stuff in terms of the vastly overpriced dollar. Holding such enormous pools of America's debt gives China not only allows China to build industry at the expense of American industry, it also affords China strategic club in the form of a financial doomsday bomb - if we really tick them off, they can dump their dollars and start denominating their export contracts in Euro or even a revalued Yuan.
It's about state power for them, not wealth per se. We look at the world differently. For them wealth isn't an end in itself as it is for us. For them it is a means to acheive their goal of the rest of the world kow-towing to the Duke of Zhao.
2005-04-13 11:16 | User Profile
[QUOTE=jay]Yes - China is the main culprit in this thing.
But isn't this an irrelevant issue? Trade deficit, Sh-made deficit. There will be no handing over of land as "collateral" and such. We are the world's #1 military and in the end, that's what will make the difference.
There will be no economic collapse IMO - b/c we'll shoot anyone who gets in the way. Do you know what happens when people try to re-po cars in the hood?
Yeah: they DO owe the money. But.....[/QUOTE]The problem with this international monetary game of chicken is that eventually, people will either dump their dollar holdings or demand higher interest to compensate for the dollar's future devaluation. The result is stagflation: monetary inflation and a reduction in the economy as all the artificial activity generated by cheap credit is choked off. Tax receipts fall and the government must remain quiescent. It lacks the credit to issue new debt and if it prints more dollars to finance military expeditions, it will provoke a currency crisis.
If there is a currency crisis, the government will be truly paralyzed. People will stop accepting checks drawn on the US Treasury. Government employees, including soldiers, will simply have to quit their jobs if they want to feed themselves. At that point, states would probably start seceding and setting up their own currencies. The trillions of dollars of US debt would suddenly become worthless as the tax base necessary to repay the debt would now be in doubt. With Americans now cognizant of the fact that all those bonds represent real obligations that must either be paid or defaulted upon, the process of secession would snowball and the dissolution of the federal government would be complete.
So I say: just keep running up that deficit, Georgie boy! :biggrin:
2005-04-13 17:00 | User Profile
How come the US didn't say anything in the beginning when the yuan was "pegged" to the dollar?
Now that the US is in trouble they want to pass their mistakes onto the shoulders of China.
The place to fix the mistakes made by the US is in the US and not in China.
By the way, you have seen nothing yet because once China takes over the hardware and India the software there will be nothing left of the US as we know it, we will be a nation of beggars and the only way to fix the problem (from the US point of view) will be by war.
2005-04-13 19:02 | User Profile
[QUOTE]Some corporate libertarian types snicker and say "well, so we're sitting here with Chinese clothes and gadgets, and the Chinese are sitting over there with overpriced dollars."
But that, while true in a sense, misses China's larger strategic game. China looks at this from a very broad historical perspective. China wants hegemony, and that means challenging America. That means that China must industrialize itself, and if possible to industrialize by de-industrializing the United States. [/QUOTE] Exactly, Walter.
2005-04-13 22:46 | User Profile
Ponce
The West can't hope to compete in the long term with India and China's labour costs and is steadily losing trade to this region. China is becoming increasingly arrogant and assertive and is now expanding it's interests into Africa which I might add is Europe's sphere. Russia is also fearful of China's territorial aims.
Whilst borrowing is also high in Europe the Europeans are far more cautious than Americans and save and invest over 20% of there per capital income. The EU is currently in a far strong position to launch economic counter measures against Asia i.e. intervening by dumping Euro's and buying dollars and Asian currencies than the US is. This however would create chaotic levels of speculation on Asian currency markets. The Asians are terrified of this prospect as it would undermine there current high growth rates.
Americans and Europeans live above there means. The US's deficit is self inflicted, China can hardly be blamed for taking advantage of the US's irresponsible fiscal planning or Europe's lack of social reform.
The most important underlying factor behind the deficit is low US savings rates and high consumer borrowing. The Chinese have the highest saving rate per capital in the world and manage to save over 40% of there net incomes. Whilst the US only saves around 2.5% of it's income.
Greg
"A lender nor a borrower be."
2005-04-14 05:09 | User Profile
[QUOTE=mwdallas]Exactly, Walter.[/QUOTE]
Right you are. The thing to keep in mind is that the Chinese look at wealth less as an end in itself as we do but rather as a means to achieving their goal of world hegemony. Thus the Chinese are much more keenly interested in RELATIVE wealth (and by extension, power) than in ABSOLUTE wealth.
In other words, the main question for them is not how rich and powerful they are, but rather how rich and powerful they are in relation to their rivals for world dominance, in particular the United States.
That's a hard concept for many of us Mericans because we just don't look at the world that way. But it is the way the Chinese view the world.