Food for thought anyway. Someone's gotta start thinking long term.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/14/cnusa14.xml

Food for thought anyway. Someone's gotta start thinking long term.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/14/cnusa14.xml


Not only that, but there is the question of what if the foreign countries that hold large percentages of our treasuries decide to call them in, a la China.

Not only that, but there is the question of what if the foreign countries that hold large percentages of our treasuries decide to call them in, a la China.

Conventional thinking holds that no foreign interest really wants to ruin the US economy-- like it or not, where the US economy goes, the rest of the world usually follows. The real issue is how do these foreign interests affect US foreign policy?

Not only that, but there is the question of what if the foreign countries that hold large percentages of our treasuries decide to call them in, a la China.
Nothing happens. Let's say China says "Pay up or else!" and we don't. Then what? They need us to buy their crap just as much, or more so, than we need their crap. Without US consumerism, China has no economy. Cutting us off would hurt us badly but it would be suicidal for them. Hell, all we have to do to keep China in check is threaten to put Walmart out of business.

Filtersweep has it right: influence on foreign policy is more worrisome.

Nothing happens. Let's say China says "Pay up or else!" and we don't. Then what? They need us to buy their crap just as much, or more so, than we need their crap. Without US consumerism, China has no economy. Cutting us off would hurt us badly but it would be suicidal for them. Hell, all we have to do to keep China in check is threaten to put Walmart out of business.

Filtersweep has it right: influence on foreign policy is more worrisome.

I guess that I should have added that this was not an argument that I necessary buy, but it is just another situation of concern for the future economic stability of this country.

I agree with boht you and filter that it is not in the interest of the rest of the world economy to see the US economy tank.

Nothing happens. Let's say China says "Pay up or else!" and we don't. Then what?

That's not how it works.

They don't threaten, they just start investing in euro based assets. Since we will be dealing with high inflation (we are printing money after all, so to speak), we will still need money from somewhere... so we pay more for it (even higher interest, which means even higher inflation).

Here is the operative graph from the story for me:

Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

Gotta love historical analysis. But I am sure THIS time it will be different.

That's not how it works.

They don't threaten, they just start investing in euro based assets. Since we will be dealing with high inflation (we are printing money after all, so to speak), we will still need money from somewhere... so we pay more for it (even higher interest, which means even higher inflation).

Here is the operative graph from the story for me:

Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

Gotta love historical analysis. But I am sure THIS time it will be different.
What if the Europeans don't allow them to start investing in such a manner? They (Europe) are much more protectionist than we are and WE are still THE market for their (China's) goods. As I see it, we both have each other over a barrel with a slight advantage to us in that we have the resources and manpower to do it all here if forced. It wouldn't be fun though.

Not only that, but there is the question of what if the foreign countries that hold large percentages of our treasuries decide to call them in, a la China.
First off T-Bills don't work the way you tried to make them out to. One must hold them until maturity in order to get the interest they desired to gain by purchasing them. Second you don't know what you are talking about. The only thing the Chinese can do is to stop buying T-Bills. THe article below gives a pretty good reason why they won't stop.

Here's (http://www.republic-news.org/archive/104-repub/104_potvin_china.htm) a good take on what is happening and why. It really doesn't make any one country look good. For better or worse, the American consumer is the engine that drives all others.
When will China pull the plug on the US?

The Chinese government has been purchasing US treasury bills to keep US consumers flush with cash to buy Chinese goods. They won't keep loaning the cash forever

by Kevin Potvin <kpotvin@republic-news.org> (kpotvin@republic-news.org)
Why, the Chinese minister of finance was asked, does China keep buying US treasury bills at the rate of about $1 billion a day? The reason, he said, is because, for the time being, China still needs US consumers to keep consuming.
The difference between what the US as a whole imports and what it exports is currently running at about $600 billion a year. That is to say, if we imagine America as a single player in the international marketplace, he is spending $600 billion a year more than he makes.
How does he get away with this? Because China and Japan, as single players in the international marketplace, loan the American that $600 billion a year. They do so in order that the American can keep spending at the rate to which he has become accustomed.
China and Japan loan the money nowadays mostly by buying US-government-printed treasury bills, and they do with the piles of US cash they have earned selling to Americans all the stuff they consume. That is, instead of holding onto the cash, China and Japan are redeeming it for big parts of the US government itself.
All the land the US government owns, its military, its buildings, all its physical infrastructure like highways, its investments, its pension plans, and its money printing presses too, are all slowly but steadily falling into the hands of these other countries' governments.
Oops, I forgot to mention the most important part of the US government they are also buying, the tax collecting regime, plus the federal tax enforcement officers, the tax court judges, the sheriffs and bond collectors, and the federal prisons. These too are all falling into the hands of foreigners at a rate directly determined by how much more Americans wish to consume over and above what they produce.
The US federal government may not run a profit, but its revenues are the biggest by far of any single organization on the planet, running currently at about $1.2 trillion—about half of which comes directly from Americans' individual income taxes. The total US government debt is over $7 trillion. Nearly half of that debt is now owned by foreign governments, chiefly Japan and China.
Since it is essentially the cash revenue streams of the US government, generated by its tax collecting regime, that endows its treasury bills with any value, if the buyers, China and Japan mainly, ever decided to stop buying more shares of the US government, the US dollar would immediately lose a great deal of its value compared to all other currencies in the world. It's simple supply and demand economics: with a precipitous drop in demand for anything, its price falls through the floor; the same would happen to the US currency if its two main buyers walked away.
The reason China and Japan have not yet slowed down buying parts of the US government revenue streams, is partly because those revenue streams are safeguarded by one of the world's most efficient tax collecting regimes and one of the world's toughest enforcement regimes. But it's also because, if they ever stopped, and the US dollar plummeted in value as a result, US consumers would find overseas products from China and Japan much more expensive, and would buy less of them, causing those manufacturing and exporting economies to crumble overnight also.
Americans have become famous for consuming more resources by far than any other people on the planet. They are known to waste stuff more than anyone. With global supplies of oil running down, Americans buy Hummers. With water tables draining dry, they build massive housing developments in their deserts. With global food production reaching peaks, Americans buy drugs that help their bodies reject excess energy they take on from eating too much food.
But to eat to excess, drain resources with no concern, and to burn energy needlessly is now the most important role Americans play in the global economy. Surrounding nations who have been selling Americans food, resources, and energy, have been pumping American's own cash back at them precisely to keep them stuffing their mouths and burning up energy at this terrifically wasteful rate.
They do so because they, too, are hooked on the production that feeds American consumption. An economist explained to the Financial Post that Americans make better consumers than anyone else because they move around in cars more, which means they can carry home more from the malls in the trunks of their cars than Europeans can, for example, who have only their arms, since they walk more to shopping areas. This was a good thing the economist liked about America.
Canada enjoys a US$50 billion annual trade surplus, almost entirely as a result of exports to the US. (Our trade surplus is about two-and-a-half times the size of China's, by the way, but only about one-third the size of Japan's). We are blithely participating in the same unsustainable, waste-encouraging practice of feeding America's excessively consuming diet, and we do so for the same reasons: in thoughtless greed for the immediate profits we can earn. Our trade surplus with America is comprised mostly of exports to them of our raw resources—minerals stripped from underground, trees plucked from atop the ground, and oil and gas drained from reserves at ever faster rates.
But Canada is also every bit an excessively consuming nation as America is. Did we not have readily available resources to ship off to the great American maw, we would be running as huge a trade deficit (per capita) with the rest of the world as America does. America gets away with its profligate waste by selling off claims to its rich and secure vein of cash produced by the US treasury through its tax-collecting regime.
Canada gets away with its waste by selling off the trees, minerals, oil and gas that our government found lying around here, and considered free for the taking (once the indigenous owners were killed off, imprisoned on reserves, or forced to sign fraudulent concessions).
Our entire annual trade surplus of roughly $50 billion is slightly less than the value of our energy exports to the US alone. In other words, were it not for just the oil and gas pulled up and shipped off wholesale to the US, Canada would confront a chronic and debilitating trade deficit every bit as worrisome as America's. We consume much more than we produce just like the wasteful Americans do, but we sell off our limited endowment of oil and gas to pay for our lack of restraint.
It's hard to say which method will last longer, and it's even harder to say which is more ethical. But what is perfectly clear is that wasteful consumption of global resources reaching levels even beyond what we can afford cannot last forever, and should not be allowed. Whoever is doing it and however it is paid for, waste is wrong. Over-consumption must be stopped.
On that note, The Republic wishes you its very special kind of Merry Christmas—perched on a bench inside a mall watching the blur of Christmas shoppers loaded down with stuff like ants carrying three times their weight.
****

For better or worse, the American consumer is the engine that drives all others.

Yeah, and when this hits it will reverberate around the world. A lot less to spend when your mortgage goes through the roof:

http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/interest_only_mortgages.png

You know, the argument about who is buying debt and how they might game it to their advantage is ignoring the elephant in the room.... the debt, the growth of the debt, and the demographic transition coming down the pipe. You know, the stuff in the article about the USA's fiscal habits?

(EDIT: please don't hotlink to this image. Save the poor guy's bandwidth and click through if you want to see it. -- hoo)

http://bigpicture.typepad.com/.share..._mortgages.png


To me the graphic says there will be a lot of homeless libs in California next year. That doesn't concern me too much :eek: First what do the IO loans represent in terms of all loans issued and in total dollars? Obviously this also doesn't represent who will not be able to pay the new payment. Rates are still pretty low too. In addition, this graphic doesn't say if it does or does not include commercial loans. That would certainly change the picture and the severity of any impact on the RE market. Lenders still want those loans to be viable or they will hurt too. I don't see a fire.

The consumer drives the economy. We have recently been taking on more debt (negative savings). Even small interest increases will have the effect of taking billions out of the pockets of consumers.

Plus the interest only loans will not only increase the interest, but start CHARGING the interest. Principle only for 3 years is how many of them read (thus the 2003 date and why it is important.) So, interest rates up, but payments on the property will be WAY up.

The consumer drives the economy. We have recently been taking on more debt (negative savings). Even small interest increases will have the effect of taking billions out of the pockets of consumers.

Plus the interest only loans will not only increase the interest, but start CHARGING the interest. Principle only for 3 years is how many of them read (thus the 2003 date and why it is important.) So, interest rates up, but payments on the property will be WAY up.

easy credit in the last 10 yrs has been artificial. greenspan knew he was just rolling the deficit ball ahead. the housing bubble may burst...