What is wrong with the US economy? Part 2

[Greg Bernhardt]

Here is a comment made by someone on another message board that I think is interested and depressing.

It took me awhile to get what was going on...and you gave some good thoughts when we chat last. This is all crashing due to institutional liquidation so they can raise cash. Cash to cover their a$$es, not to buy back in...like you said.
It's going to end up more about who is NO LONGER in the market more than the shorts or what retail thinks. Suck enough liquidity out of the market and this is what you get...a hard and paper asset drain. Now imagine what will happen if/when the early and late majority of baby boomers pull their funds for retirement. This drain is going to remove much of the "money supply" in this country and in turn globally. There will be more damage to come from companies closing or tightning up, job loss etc...

 

[Astronuc]

I don't agree that the situation necessarily must go that way.

What we need is good, strong leadership, and for the majority of people not to panic - perhaps easier said than done. The cash is there - but it may not be enough to cover all current and future obligations. Printing more money doesn't work because inflation would blow up - Germany after WWI and before WWII.

Realize the production and the economic system is still there - production still occurs.

We've been drifting along the economic river have a nice time, and now we've hit white water. Hold on and don't fall out of the boat. If somebody falls out - pull them back in. Everybody will make it through to the next stretch of calm water.

 

[edward]

A closer look at credit default swaps.

As the government buys mortgage-backed securities from teetering financial institutions at less than face value prices, issuers of the credit default swaps could be liable for the difference.

That's troublesome enough, but it actually gets worse.

Buyers of credit default swap insurance are not required to own the underlying securities they are insuring.

In other words, the investor can buy insurance on a mortgage-backed security without having to buy the security itself. When that security turns sour, whoever is holding the credit default contract — whether they actually own the security or not — can demand payment for the face value of the security.

This has created a market in which speculators actually are betting that mortgage-backed securities will lose their value.

http://ap.google.com/article/ALeqM5hOsN_qL-c8hjW8BvU160ZYwhYB8AD93LSV480

Are we trying to put out a fire by dumping money on it? To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

Give people penalty free access to their 401 (k)'s. (This was in the original bail out plan.) This would help stop the bleeding among the middle class.

If people were allowed to roll their retirement plans into CD's and T Bills the government wouldn't have to borrow as much from foreign countries to finance the bail out.

OK so this does sound nutz...I'm just venting. My son's 401 (k) is down by over 40% and that's just through the end of September.

 

[mheslep]

The US needs to have a trade surplus.

Why? Needs to have? What do you propose are the consequences of not having one?

Bush's speech of reassurance in the rose garden conjures images of Nero playing a violin while Rome burned. Bush still doesn't get - not that he ever did. They haven't yet addressed or admitted the fundamental problems, and no one knows for sure if the bailout will work as hoped.

What are the the 'fundamental problems' then that have not been admitted, and how do recent actions by the Central banks/Treasury/Congress fall short of your prescription for addressing them?

 

[mheslep]

... To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

A large share of the home-owners are the speculators by exactly the mechanism prescribed - they paid only a small % of the value of the asset, or none at all in many cases.

 

[LowlyPion]

Are we trying to put out a fire by dumping money on it? To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

Unfortunately the banks and insurance companies chasing juiced returns have impaired their balance sheets and they are the speculators as much as anything. This is apparently Icelandic banks' problem and a good part of the reason that governments are having to step into bail out the situation. Some reports put the CDSes at 63 Trillion. This needs to be unwound because apparently it is all leveraged and layered and interrelated. And there has been lots of abuse.

 

[Astronuc]

Why? Needs to have? What do you propose are the consequences of not having one?

Because that represents wealth/cash.

China has trade surplus with the US, and I believe Japan and others do to.


Where does the US Treasury borrow money? From China, Japan, EU countries.


We buy their products with borrowed money.


The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

 

[edward]

A large share of the home-owners are the speculators by exactly the mechanism prescribed - they paid only a small % of the value of the asset, or none at all in many cases.

Oranges and apples. How many home buyers intentionally bought a home with failure in mind?? How many home owners intentionally bought an over the counter insurance policy to speculate on another persons potential failure??

 

[jal]

It helps to get a prospective by reading what analyst from other countries are saying.
From this website http://www.bmonesbittburns.com/Economics/
Look at http://www.bmonesbittburns.com/economics/bottomline/20081010/bottomline.pdf
More Action—Crisis Intensifies
October 10, 2008
Dr. Sherry Cooper, Executive Vice President, Chief Economist
We are quickly ticking off the rescue actions I predicted early this week:
Coordinated rate cut—done and more to come
Direct capital infusion into healthy banks through preferred share investment by
Treasury—done in the U.K., likely the next step in the U.S.
Insure all U.S. bank deposits regardless of size. Denmark, Germany and Ireland have
already done so.
Guarantee interbank debt—done in the U.K. The U.S. Treasury might go as far as
guaranteeing all bank debt.
Accelerate the FDIC process to shut down insolvent banks or (better still) arrange
sales of insolvent banks with or without government assistance.
Loans to state governments, which in turn could make loans to local governments.
Treasury could purchase municipal bonds and insure state and local pension funds.
Government low-interest loans to household
G-7 finance ministers are meeting this weekend. Secretary Paulson is holding a press
conference at 6:45 PM tonight to discuss the outcome of today’s meeting. No doubt it
will be a busy weekend, with additional actions taken prior to the market open Asia Sunday
night. Watch out for another wild Monday.
After the election and (maybe even prior to the Inauguration) further actions will be taken:
A government housing bailout including subsidized loans to creditworthy delinquent
homeowners and government purchases and redevelopment of vacant housing.
Fiscal stimulus for the economy, including stepped up government spending for
infrastructure, alternative energy, education and health care.
Massive enhancement and restructuring of financial market regulation.
========
There is soooo much more info in the link … do read it.
=======
In passing, it looks like the gov. could guarantee all of the ill gotten gains of those who oppose gov. intervention.
How ironic.

 

[mheslep]

Because that represents wealth/cash.

China has trade surplus with the US, and I believe Japan and others do to.

I think this mistakes the symptom for the disease. Consider : trade rules aside for a moment, the US could simply pass a large tariff on imported goods to force the trade deficit to zero. To what effect? The cost of goods in the US would sky-rocket and the economy would likely tank as when this would tried w/ Smoot Hawley. So visibly, erasing the trade deficit does not necessarily represent 'wealth/cash.'

Where does the US Treasury borrow money? From China, Japan, EU countries.

We buy their products with borrowed money.

The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

You are referring here to deficit spending by the US government, not the international trade balance.

 

[D H]

To hell with the speculators. most of them paid only a small percentage of the value of a security to get the insurance.

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

To hell with those homeowners. Most of them are speculators, too. I do not want the government lending any financial support to those who refinanced their mortgage every time the paper value of their house went up so that they could afford to have a fistful of Starbucks lattes a day, a ski trip in St. Moritz, a weekend or two at Cabo, and an African safari. They can start drinking McDonalds coffee and spend their weekends at a nearby state park. I do not want the government lending any financial support to those who committed fraud on their loan applications, claiming they had an annual income twice their real income. That real estate agents and loan examiners colluded in that fraud is irrelevant. The fraud would never have happened if the applicants hadn't been a part of the greed equation.

OK so this does sound nutz...I'm just venting. My son's 401 (k) is down by over 40% and that's just through the end of September.

Mine has tanked, too. It looks like I will have to work another twenty years -- in other words, well into my seventies.

Oranges and apples. How many home buyers intentionally bought a home with failure in mind??

Anyone who lied on their application did exactly that.

 

[mheslep]

Oranges and apples.

Speculator: one who buys an asset for anticipated gain in market value, versus the material use of that asset. The definition does not depend on the political niceties of the asset.

How many home buyers intentionally bought a home with failure in mind?? How many home owners intentionally bought an over the counter insurance policy to speculate on another persons potential failure??

People buy insurance policies every day, expecting a pay off in the event of some catastrophe: life, property, auto. Then, fortunately, those policies can be resold on the marketplace to distribute the risk. If you are referring in general to 'shorting', or betting that an asset will decline in value, that practice aids in identifying fraudulent companies and 'irrational exuberance'. Warrent Buffet:
http://www.fool.com/investing/value/2006/06/01/berkshire-behind-the-scenes-part-5.aspx

 

[Astronuc]

I think this mistakes the symptom for the disease. Consider : trade rules aside for a moment, the US could simply pass a large tariff on imported goods to force the trade deficit to zero. To what effect? The cost of goods in the US would sky-rocket and the economy would likely tank as when this would tried w/ Smoot Hawley. So visibly, erasing the trade deficit does not necessarily represent 'wealth/cash.'

I said nothing of tariffs. And yes the government could, but that would provoke similar action on the export from the US.

You are referring here to deficit spending by the US government, not the international trade balance.

No - I was referring to the trade deficit. The government deficit is another problem. And the uncovered obligations of SS, which have not been addressed.

The US economy is like a victim of a car accident. The Treasury and Fed are the EMT/ER staff, and they are doing the intervention to keep the patient from further injury or death. Meanwhile, the patient unbeknowst to the patient and EMT/ER, the patient has diabetes, heart disease and cancer that are affecting recovery. Treat the injuries and keeping patient alive will not treat diabetes, heart disease and cancer.

The diabetes, heart disease and cancer are the credit default swaps (CDSs), other financial instruments, devalued real estate and collateral, hyper-consumerism, economic disparity, . . . . Basically the US cannot sustain the standard of living achieved two years ago because the money and capital (wealth) simply do not exist to do so. It's time people wake up and realize that!

 

[mheslep]

I said nothing of tariffs. And yes the government could, but that would provoke similar action on the export from the US.

I know you didn't. You said the US 'needs a trade surplus' because a surplus 'represents wealth/cash.' I presented one scenario to show where this is not the case.

No - I was referring to the trade deficit.

Again, you said:

Where does the US Treasury borrow money? From China, Japan, EU countries.

We buy their products with borrowed money.

The US is living on a credit card. What happens with the interest can't be paid? Default? Then out the window goes full faith and credit of the US Treasury. Perhaps that's the plan.

The US Treasury does not borrow money because of the trade deficit.

Basically the US cannot sustain the standard of living achieved two years ago because the money and capital (wealth) simply do not exist to do so. It's time people wake up and realize that!

I don't agree for any time window longer than a couple of years, but let's say you are correct. If people 'wake up and realize that' as you demand, what action should they then take, once so informed of the truth?

 

[chemisttree]

It appears to me that direct intervention with the homeowners struggling with mortgages would be a quicker way to snuff out the flames. The important thing is to do it now and not wait until a committee swayed by lobbyists makes the decision sometime next year.

I think the problem has moved way beyond the mortgage crisis. The mortgage crisis was the first crack to appear in the disfunctional credit default swap market. Once the flames have spread there it is game over. The very structure of the credit market itself is at risk now.

This is why the Fed is throwing billions at AIG, lowering interest rates and begging for help from the rest of the world. Personally, I don't think there is anything that can be done to stabilize it and "http://www.marketwatch.com/news/sto...8462-1146-45FF-A280-00B7CD74BC49}&dist=msr_2"" Paulson appears to be willing to debride the weaker or more exposed banks. That coupled with the increase of FDIC insurance to 250K bodes ill for cash itself.

The next bad step will be runs on apparently unaffected banks by depositors. Paulson will make it illegal to do so (since the "value" of the deposits is insured 250K, y'know) and we'll all be lucky to have the use of our credit cards before it is all over.

A real sphincter-tightener, this one...

From the 3-week old article I quoted earlier:

OK, now here's the place where you may need to cover your eyes.

Satyajit Das, a credit derivatives expert based in Australia, told me in a phone interview Monday from Singapore that these events have "essentially destroyed the capacity of the banking system to provide funding to businesses." He added: "Investment banks have destroyed their capital by making foolish loans on a massive scale, and the chance that they will get new capital, as they did back in the spring, is low. If you are a sovereign wealth fund and give new money to Wall Street now, you look like a chump. They won't be sugar daddies anymore. It won't fly politically at home. It isn't going to happen."

So who's going to refill the capital well? You may have heard that money does not grow on trees, and neither can countries actually "print" money, since that actually involves the sale of new bonds at a time when the market is flooded with them.

Well, U.S. Treasury and Federal Reserve officials have urged American banks to pool together a $70 billion fund to bail out weaker members of their tribe. But Das scoffed at the effort as a nonstarter, considering they are all equally desperate to hold on to their capital: "It's like the deaf . . . volunteering to help the blind," he said.

So you can see why stock markets are suffering. The credit engine that has fueled the planet's economic growth is now kaput, as banks and governments have downshifted from risk-taking mode into survival mode. The only hope now is that the unraveling will not accelerate and become an uncontrolled spiral into the ground.

"The European Central Bank and U.S. Federal Reserve have held international financing together with chicken wire and hope, and only now are people seeing how fragile it has been for years," Das said. "As the contraction of credit feeds out into the real economy, business expansion will grind to a halt, unemployment will soar, and consumer spending will falter -- all of which leads, in turn, to lower production and more unemployment."

...Now he thinks the financial part of the game is in the fifth inning, as it has raced toward the inevitable conclusion of large-company bankruptcies faster than he expected. There are only so many major institutions that can go under, after all, and already two are dead, and two more are on the brink.

If American International Group can find the capital it needs, it will end the current panic. If it can't, look for more selling -- especially in Asia, says MSN Money's Jim Jubak.

Yet it turns out we're in a double-header, and the nightcap involving the crushing of the "real economy," which is where all of us live and work, is only in the first inning -- as companies are just starting to cut back jobs in a serious way to match diminished business and the loss of borrowing power. On Monday, Hewlett-Packard (HPQ, news, msgs) and Lehman Bros. announced plans to lay off 25,000 people each.

Now we just have to hope this game isn't called because of darkness.

That last bolded part is where the insidious side of the Credit Default Swap monster will eat us all...

 

[mheslep]

I think the problem has moved way beyond the mortgage crisis.

I think that is mistaken. Until housing prices stabilize as Greenspan says we have a problem, regardless of action/inaction of derivatives of those mortgages. That is likely to take until the middle of next year according to him.

 

[chemisttree]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

 

[edward]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

You may be right. The average credit default swap is sold ten times. No one knows where they are or when they will pop up.

http://www.todaysfinancialnews.com/...efault-swaps-a-blind-date-goes-wild-4718.html

 

[edward]

Speculator: one who buys an asset for anticipated gain in market value, versus the material use of that asset. The definition does not depend on the political niceties of the asset.

It sounds like you are insinuating that everyone who bought a home in the last three years did it for speculative purposes.

People buy insurance policies every day, expecting a pay off in the event of some catastrophe: life, property, auto. Then, fortunately, those policies can be resold on the marketplace to distribute the risk. If you are referring in general to 'shorting', or betting that an asset will decline in value, that practice aids in identifying fraudulent companies and 'irrational exuberance'. Warrent Buffet:
http://www.fool.com/investing/value/2006/06/01/berkshire-behind-the-scenes-part-5.aspx

Well it looks like we identified the fraud and irrational exuberance... about two years too late.

 

[russ_watters]

No - I was referring to the trade deficit. The government deficit is another problem.

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

You say these things over and over: start researching it and prove it to us. Hopefully, you'll read enough to learn you misunderstand the issue.

 

[mheslep]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

CT- As I tried to point out before, the Time article you pulled this from is flawed, at least:
1) The mortgage numbers are for the US only; the credit derivative numbers from the http://www.isda.org/statistics/recent.html#2007end" are for the global market, the entire planet.
2) The derivative numbers above are transactions, not value. That is, if a $1 CDS is traded ten times in a year, ISDA brokers report that as $10 worth of transactions. This makes sense for the brokers, as they make their money by taking a piece of every trade, thus market volume is their figure of interest. Similarly, if one counted the number of times a mortgage was sold and resold, the mortgage transaction figure would be far higher than $7-14T. Or, look at the total market activity of all of the total derivatives market which includes currency trades, interest rate contracts, CDS and others: $596T/2007. That is 10x the GDP of the entire world (http://en.wikipedia.org/wiki/World_Economic_Outlook" ).

You may find the 'Gross market value' of CDSs useful: $2T/ 2007(again, worldwide) which is the value of the securities on the books on a given day.
OTC derivatives market activityin the second half of 2007
http://www.bis.org/publ/otc_hy0805.pdf?noframes=1, page 5 for GMV definition, data page 7.

 

[edward]

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

It might as well be because we will have to borrow to pay it. Ironically we will have to borrow from the same country that we owe most of the trade deficit to.

 

[mheslep]

It sounds like you are insinuating that everyone who bought a home in the last three years did it for speculative purposes.

Not at all. I think most people had an eye towards the appreciation of their home, or were only in part speculators if you like. But fortunately the majority of US mortgages are solid, taken out by people intending to make longterm use of their homes. A lesser fraction were pure house flipping, nothing down balloon mortgage maniacs, enabled by the unscrupulous Countrywides, and they in turn enabled by Fannie/Freddie. Unfortunately, the damage done by the lesser fraction in the financial sector is intense.

 

[edward]

CT- As I tried to point out before, the Time article you pulled this from is flawed, at least:
1) The mortgage numbers are for the US only; the credit derivative numbers from the http://www.isda.org/statistics/recent.html#2007end" are for the global market, the entire planet.
2) The derivative numbers above are transactions, not value. That is, if a $1 CDS is traded ten times in a year, ISDA brokers report that as $10 worth of transactions. This makes sense for the brokers, as they make their money by taking a piece of every trade, thus market volume is their figure of interest. Similarly, if one counted the number of times a mortgage was sold and resold, the mortgage transaction figure would be far higher than $7-14T. Or, look at the total market activity of all of the total derivatives market which includes currency trades, interest rate contracts, CDS and others: $596T/2007. That is 10x the GDP of the entire world (http://en.wikipedia.org/wiki/World_Economic_Outlook" )

Then again:

While the media criticized AIG for its reckless spending, the nation's largest insurer has been brought to its knees not by swanky retreats but by its exposure to massive liabilities through its participation in credit-default swap (CDS) market during the past five years. This arcane credit derivative market originated in the 1990's as a way of hedging risks in the bond markets, but since the year 2000 it has expanded from $900 billion in value to $64 trillion. Yes, that's trillion with a "T". For reference, the nation's entire annual economic output is estimated to be about $14.3 trillion. How could a market grow so quickly? The most crucial factors were the total lack of regulation and the potential to speculate on the value of assets held by someone else.

http://media.www.hlrecord.org/media/storage/paper609/news/2008/10/09/News/All-Hands.On.Deck.As.Global.Economic.Crisis.Intensifies-3478761.shtml


Global market? We are a big part of that right? Do the exact figures on the CDS scene even matter now that we know that they are what lured investors until they took the economy down?

 

[Art]

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

You say these things over and over: start researching it and prove it to us. Hopefully, you'll read enough to learn you misunderstand the issue.

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

The trade deficit is caused by the people, who are not paying enough tax to fund the gov't spending programs, instead spending much of that 'unpaid tax' on imports particularly from China. So it is quite reasonable to simplify these transactions and say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

Given the current state of the US equity markets the US is on course for another big headache from their trade deficit. The theory of trade deficits is that the dollars going out come back into the country in the form of investments and so essentially the excess expenditure is paid for by selling off assets. This is fine if those assets are increasing in value as the nett percentage remaining in US ownership isn't particularly adversely affected but with share prices tumbling it means those dollars coming home to roost will buy a much bigger slice of America's assets and thus a bigger slice of the revenue streams generated by those assets. That is of course if foreign investors still want to buy them at all and if not then the US is in deep trouble as it's currency will become worthless, at which point you have no choice but to become a nett exporter to get the foreign currency you need to purchase essential imports. I'm not suggesting this last scenario is imminent but there are plenty of reasons to start worrying about it.

 

[Astronuc]

The US Treasury does not borrow money because of the trade deficit.

The Treasury borrows the money to finance the deficit/debt of the government. They have to borrow funds from foreign sources because the US sources don't have the cash.

Where do US financial instutions get there cash - from foreign sovereign funds.

How many $trillions have moved off-shore in the last two decades? Tyco (incorporated in Massachusetts, moved HQ to Hamilton, Bermuda) and Halliburton (moved from Houston to Dubai, UAE) have moved themselves off-shore. They and other US corporations and private individuals have been moving their money out of the US to off-shore banks. They don't pay taxes and the simply turn around and loan the money back to the US economy - corporations and government.

A good chunk of the funds for the War on Terror goes 'offshore'!

The chronic flow of capital out of the US is part of the current problem.

The US is the world's largest debtor nation.

Consumerism is as American as cherry pie. Plasma TVs, iPods, granite countertops: you name it, we’ll buy it. To finance the national pastime, Americans have been borrowing from abroad on an increasingly stunning scale. In 2006, the infusion of foreign cash required to close the gap between American incomes and consumption reached nearly 7 percent of gross domestic product (GDP), leaving the United States with a deficit in its current account (an annual measure of capital flows to and from the rest of the world) of more than $850 billion. In other words, the quantity of goods and services that Americans consumed last year in excess of what we produced was close to the entire annual output of Brazil. “Brazil is the tenth largest economy on the planet,” points out Laura Alfaro, an associate professor of business administration who teaches a class on the current account deficit at Harvard Business School (HBS). “That is what the U.S. is eating up every year—a Brazil or a Mexico.”

Whether this practice is sustainable—and if not, how it might end—are questions that divide scholars and investors alike. We have borrowed so much from abroad—between half a trillion and a trillion dollars a year for the past six or seven years—that in 2006, our investment balance with the rest of the world (what we pay foreign investors on their U.S. assets versus their payments to us on our investments abroad, historically nearly equal) tipped to became an outflow for the first time in more than 50 years. We are a debtor nation swiftly heading deeper into debt.
. . . .

Trouble struck Mexico in 1995, Thailand, Malaysia, and other countries in 1997, and Argentina in 2001, after those countries borrowed vast sums in the international marketplace. Argentina before the crash had been a model developing nation and a darling of the IMF, closely following the fund’s economic prescription for integration into the global system of finance and trade. But even the IMF could not save the country from the destabilizing effects of international capital flows. When global investors realized that Argentina’s debt load was unsustainable, they sold their assets, called in their loans, and exited the country. Overnight the Argentine peso plummeted in value against the dollar, the currency in which debt had been issued, and staggering obligations suddenly became unpayable. Argentines who had financed their mortgages in dollars lost their homes. There was a run on the banks, and the government imposed a limit on cash withdrawals. In a country abounding with wheatfields and cattle ranches, starving people began raiding garbage bags in wealthy neighborhoods.

Ref - http://harvardmagazine.com/2007/07/debtor-nation.html

Debtor Nation (April 22, 2004)
http://www.thenation.com/doc/20040510/greider

The backstory for this election year lacks the urgency of war or of defeating George W. Bush but focuses on a most fateful question: When will this hemorrhaging debtor nation be compelled to pull back from profligate consumption and resign its role as "buyer of last resort" for the global economy? The smart money assumes such a momentous reckoning probably won't occur in time to disrupt Bush's re-election campaign, but it may well become the dominating crisis in the next presidential term, whoever is elected. At that point, the United States will lose its aura of unilateral superiority, and globalization will be forced to undergo wrenching change. The American economy, in other words, is in much deeper trouble than most people realize.

The facts are not secret. Despite ebbs and surges, the gap between US exports and imports has been steadily widening across three decades. The trade deficits of the early 1970s (due mainly to soaring oil prices) were trivial in size, but Americans were shocked in 1978 when the deficit hit $30 billion (TV sets and some cars were now made in Japan). During the 1980s, the trade deficit expanded enormously, as Washington's strong- dollar policy crippled US manufacturers and companies moved jobs and production offshore in swelling volume. After a recession and dollar devaluation, the gap shrank briefly, but soon began expanding again.
. . . .
Last year [2003] it [trade deficit] set another new record: $489 billion.
. . . .

Looks like in 2008, the trade deficit will exceed $700 billion.

US Trade Deficits
Year $Billion
2003 . 494.81
2004 . 617.31
2005 . 723.69
2006 . 765.27
2007 . 708.55
2008 . 473.90

In the last 3.66 years, the US has accrued $2.67 trillion deficit, and in the last 5.67 years the accrued deficit is nearly $3.8 trillion. That money then is either loaned to the US or finances other economies that compete with the US. Some of it also finances al-Qaida.

http://www.census.gov/foreign-trade/statistics/historical/index.html

 

[mheslep]

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

The trade deficit is caused by the people, who are not paying enough tax to fund the gov't spending programs, instead spending much of that cash on imports. So it is quite reasonable to say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

A coherent argument. Coherent, but over drawn:

...the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. If we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.

http://www.cato.org/testimony/ct-dg061198.html
Also note that a trade surplus is not necessarily a good thing either.

...Frankly, we would have more reason to worry if the U.S. were running a trade surplus. In Mexico in 1995 and more recently in South Korea and other East Asian countries, trade balances flipped overnight from deficit to surplus because of plunging domestic demand and the flight of foreign capital. In Japan today, a soaring trade surplus has been accompanied by record high unemployment. It's no coincidence that America's smallest trade deficit in recent years occurred in 1991--in the trough of our last recession.

 

[Art]

http://www.cato.org/testimony/ct-dg061198.html
Also note that a trade surplus is not necessarily a good thing either.

As I pointed out in the second paragraph of my post how you arrive at a trade surplus is kind of important.

If it's through the fact nobody will sell to you any more because your currency is worthless then it is obviously not a good way to get there but on balance a healthy trade surplus is better than running a deficit because it means you are accumulating capital and not leaking it.

One proviso peculiar to the US is the impact of the petro dollar. This allows the US to run a limited trade deficit as if greenbacks end up in someone else's foreign reserve fund and never come home then that means you have managed to exchange cheap pieces of paper for hard goods and services. However the recent fall in the price of oil and the move by some big oil producers to other currencies bodes ill for the US economy.

 

[mheslep]

The US trade deficit is currently declining:
http://www.epi.org/images/intlpic20080214figa600.gif
Because:

The improvement in the deficit was explained, in part, by continued rapid growth of U.S. exports, which increased a record $176.1 billion (12.2%) in 2007, as shown in the Figure A. A slowdown in import growth to 5.9% ($129.2 billion) also played a key role. The slowdown in import growth in 2007 reflects softening in consumer spending in the overall economy. Both the import slowdown and export growth were probably driven in part by the depreciation of the dollar in recent years.

http://www.epi.org/content.cfm/indicators_intlpict_20080215

 

[quadraphonics]

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

Not necessarily. The shortfall is made up by borrowing, sure, but that doesn't imply that only foreign countries do the lending. The debt in question is largely sold on an open market, and so can be bought by any private or public entities, foreign or domestic. Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. Also, more than half of the national debt is actually owned by other parts of the Federal Government, such as the Federal Reserve.

So it is quite reasonable to simplify these transactions and say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

It would be equally correct to say that China is loaning the US money so that they can sell goods to Americans. Neither statement is particularly enlightening, however, absent a holistic understanding of the bilateral relationship between the two, which affects not only foreign debt holdings but also interest rates, inflation and currency strength. For example, part of the reason that China has been buying so much US debt is that they must do this to support the dollar, or there would be no trade surplus to flood them with dollars in the first place. This extra demand for government paper drives down the interest rates required to finance government spending (and everything else) and leads to faster consumption-led growth, and meanwhile the access to cheap Chinese products keeps inflation in check.

Also, note that the returns on T-Bills have, over the period where China has been accumulating them, been close to, or even below, inflation in the dollar, and far below the inflation in the particular imports that China requires (oil and grain). Given this, it would be even more correct to say "China gives the US money to buy Chinese products."

 

[Art]

Not necessarily. The shortfall is made up by borrowing, sure, but that doesn't imply that only foreign countries do the lending. The debt in question is largely sold on an open market, and so can be bought by any private or public entities, foreign or domestic. Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. Also, more than half of the national debt is actually owned by other parts of the Federal Government, such as the Federal Reserve.
It would be equally correct to say that China is loaning the US money so that they can sell goods to Americans. Neither statement is particularly enlightening, however, absent a holistic understanding of the bilateral relationship between the two, which affects not only foreign debt holdings but also interest rates, inflation and currency strength. For example, part of the reason that China has been buying so much US debt is that they must do this to support the dollar, or there would be no trade surplus to flood them with dollars in the first place. This extra demand for government paper drives down the interest rates required to finance government spending (and everything else) and leads to faster consumption-led growth, and meanwhile the access to cheap Chinese products keeps inflation in check.

Also, note that the returns on T-Bills have, over the period where China has been accumulating them, been close to, or even below, inflation in the dollar, and far below the inflation in the particular imports that China requires (oil and grain). Given this, it would be even more correct to say "China gives the US money to buy Chinese products."

Absolutely. Both Japan and China have ran vendor finance programs for years. However self-evidently this model is unsustainable in the long run and in fact China and Japan have both cut back severely on their 'vendor finance programs' as they have become worried about the future value of the dollar debt they hold. Bear in mind the same worries will also affect US lenders who may decide buying Euro debt is a safer bet than buying US debt.

You can also throw in the OPEC countries. They too have been buying up US debt through London to bolster the US dollar as they will take a massive hit too if the dollar plummets but again they too are busy working on their exit strategy.

The biggest buyers last time I looked were the Caribbean Islands and as it is pretty obvious it is not their gov'ts buying the debt one wonders who is masking their purchases through this channel? There is even some suggestions that the US gov't itself is buying it's own debt to sustain confidence in the dollar.

 

[mheslep]

...Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. ...

True, but since the share of US debt held by other governments is increasing, this means that foreign entities are currently buying more than half of any given Treasury bond offerings.
www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2007.pdf

 

[Astronuc]

Stocks got slammed, but was it a `crash'?
http://news.yahoo.com/s/ap/20081010/ap_on_re_us/meltdown_crash_or_not

Some news organizations and investors are hesitating to use the word to describe Wall Street's terrifying sell-off.

A crash is commonly defined as a 20 percent decline in a single day or several days. The drop over the seven days ending Thursday lopped 20.9 percent off the Dow Jones industrial average, which would qualify as a crash. On Friday, the Dow fell again, bringing the cumulative loss to 22 percent.

"This quick, this amount, in these few days, obviously is a crash," said Howard Silverblatt, senior index analyst at Standard & Poor's. "The crash deals with the speed as well as the intensity of it."

CNBC host Dylan Ratigan was among those uttering the word on Thursday, calling the decline "a cascading crash." The Wall Street Journal, the most influential publication in the financial world, hedged somewhat on Friday's front page, saying the scary drop over the past several days "amounts to a slow-motion crash."

But not everyone was prepared to go that far.

The Associated Press did not use the word "crash," referring to Thursday as a "runaway train of a sell-off."
. . . .
While The New York Times' news columns called Thursday's trading a "rout" in which "panicky investors dumped stocks en masse" in a "stomach-churning 90 minutes" at the end of trading, the paper carefully avoided the word "crash," saying the 20.8 percent decline over six trading days "is similar to the drop in the Dow on Black Monday, Oct. 19, 1987." (And that, of course, is a day most people refer to as a crash.)

. . . .

Maybe it's more like a muli-car pileup on the interstate in reduced visibility conditions.

But there is great buying opportunities for some.

It will be interesting to see what happens on Monday. We're almost one week shy of the 21st anniversary of Black Monday, Oct. 19, 1987. Hopefully we'll start to see a recovery, but some are predicting lower levels for the stock markets.

 

[Astronuc]

It's not just the US economy -

Ireland's economy ends long winning run
http://news.yahoo.com/s/ap/20081011/ap_on_re_eu/eu_ireland_death_of_a_tiger

. . . .
Tens of thousands of Irish face a financial white-knuckle ride because Europe's longest-running winning streak — the vaunted Celtic Tiger economy — has come to an inglorious end. Last month, Ireland became the first country in the 15-nation euro zone to fall into recession, and economists predict that a familiar era of closing factories and net emigration could return.

"We face stark choices. If we do not make the right ones, it will have catastrophic consequences," Prime Minister Brian Cowen said at a dinner of the country's top businessmen last week as his government authorized an emergency plan to insure the nation's banks against collapse.

The speed of the reversal has stunned Ireland top to bottom. And denial is giving way to desperation.

"We've had this corpse on the kitchen table for a while, and it's just today we've decided that it's actually dead," said Eddie Hobbs, Ireland's ubiquitous investment guru.
. . . .
From 1994 to 2007, Ireland was one of Europe's brightest stars. Its gross domestic product expanded at nearly triple the European average. Unemployment fell from 15 percent to below 4 percent, and a centuries-old tradition of emigration was turned upside down.

About 1,000 foreign companies, more than half of them American, arrived or expanded in this English-speaking outpost on the EU's western edge. The companies largely sought to exploit a 12.5 percent rate of business tax, the lowest within the euro zone, and took heart from the arrival of peace in the neighboring British territory of Northern Ireland.
. . . .
The bank-heavy Irish Stock Exchange has shed nearly three-fourths of its value since April 2007. As Dublin bankers' ability to borrow internationally dried up, the government responded with a world-first guarantee for all deposits and borrowings of Irish-owned banks — a liability so big it represents $130,000 per man, woman and child.
. . . .

The global economy is also showing signs of weakness.

 

[mheslep]

It's not just the US economy -

Ireland's economy ends long winning run
[URL]http://news.yahoo.com/s/ap/20081011/ap_on_re_eu/eu_ireland_death_of_a_tiger[/url[/QUOTE]
Especially note in that article a major reason why Ireland boomed for so long:

About 1,000 foreign companies, more than half of them American, arrived or expanded in this English-speaking outpost on the EU's western edge. The companies largely sought to exploit a 12.5 percent rate of business tax, the lowest within the euro zone, and took heart from the arrival of peace in the neighboring British territory of Northern Ireland.

And the US top corporate rate is 35% (with 3-5% surtaxes on top of that in some cases), one of the highest in the world. Astronuc - up thread somewhere you exclaimed about numerous US firms moving off shore. Here is one major reason why. Senator Obama correctly noted in the last debate that the US corporate law is full of loop holes, though I'd say loop holes are an irresistible temptation for lawmakers when the rate is high. Senator McCain has proposed lowering this rate to 25%, Sen. Obama will close the loop holes, raise taxes further on some firms (oil/gas), cut taxes for alt energy firms.
http://www.usatoday.com/money/perfi/taxes/2008-03-20-corporate-tax-offshoring_N.htm
http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf