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| Home Front Economy | |
| Debt Man Walking | |
| 2008-11-19 | |
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| Posted by:Steve White |
| #2 If economics were a zero-sum game, as it generally should be, this would be the case. But it isn't. A true zero sum economic picture hasn't existed since the end of mercantilism, in which whoever had the most specie (gold and silver) was the wealthiest and most powerful. Instead, economic systems have surpassed "tokenism", the use of paper to represent specie. Paper money first represented specie or other product, still being based on some physical asset. But then it evolved, so that the value of currency was based on process--that is, a currency that is used is more valuable than one that is not. More use means stronger economy. This works with one currency, but if there are two currencies available, the opposite becomes true. The less desirable currency is used, and the more desirable currency is saved. The "Iron Rule" of currency. This paradox is the very basis of the international currency system that was first regulated at Bretton Woods. The idea was currencies should be "normalized" with each other, so they could follow two sets of rules. At home in Germany, for example, a Deutsche Mark had about the same purchasing power as the US dollar did in America. Domestic policy determined its national value in its own country. However, in international trade, the dollar and Deutsche Mark floated against each other, to accurately reflect each nations relative prosperity, and allow economic adjustments to be made to strengthen weak currencies and weaken strong currencies, to maintain a balance. But then, as it will, leverage entered the picture, at about the same time. This allowed everybody's bad economic habits to run wild without restraint. And the author pretty well explained that part. But he missed the conclusion to the play. That is, that the US debt supported by Japan and China has reached a point where it cannot continue. The commercial markets, who deal in leverage a factor greater than even the US government, are sucking all the liquidity out of the market. Japan, wisely, is no longer buying US Treasury bills, and in fact is starting to cash them in. Because of this, China has surpassed Japan as the largest debt holder, just in the last few days. But China could and can only buy so much US debt. It cannot also buy the US debt the Japanese are selling as well. And even the debt the Chinese were buying was paid for by selling goods to the US. If the US cannot buy Chinese products, China can't buy any US debt. But with the downturn this causes in China, they can't even continue to keep US debt, much less buy more. They *have* to sell it to keep their own economy from collapse. See the spiral? Not only won't the US be able to sell more debt, but more and more of its tax revenues will have to be used to pay off cashed T-bills. And because the US economy is in decline, tax revenues are going to be down hard. In 2008, 9% of the US budget was in paying the interest on the debt. In 2009, it will be about 10% PLUS paying the much, much greater principal that Japan, and likely China, will get by cashing in their bills. So how much of the budget could that be? 25%? 35%? And based on tax revenues that are from 10-20% lower next year. Obama my try to spend his way out of it, because that is what was done in the past. But this time it won't work, because it can't work. There is nobody left to subsidize the US government spending spree. Next he will try the equivalent of "printing money", which is called "monetizing the debt". But that is what was done in Weimar Germany, and in Zimbabwe today. Such money instantly inflates. Jimmy Carter tried to do that, to inflate the US government out of its debt. But Paul Volcker, the chairman of the Fed, was then forced to raise the prime lending rate in a quid pro quo with Carter's money machine. This in effect neutralized Carter's scheme, and thought the economy was severely damaged, it prevented Carter from destroying it. So as much as Obama wants to spend money like there is no tomorrow, there is not going to be any money for him to spend. So he and congress are going to be savaged, when they have to do things like slash Social Security, Medicare and Medicaid. But they will have no choice. |
| Posted by: Anonymoose 2008-11-19 19:06 |
| #1 Key point seems to be "The United States has acquiesced in large trade deficits--and their effect on the U.S. workforce--in exchange for foreign funding of our budget deficits. And Asia has accepted a lower standard of living in exchange for export-led growth and a lower risk of currency crises." As long as Asia sees financing the US budget deficit as a safer place to park their money than elsewhere, the situation will continue. The other situation still unwinding is the collapse of financial derivatives which have financed the shadow banking system. This has the effect of shrinking the supply of money (=deflation). |
| Posted by: Anguper Hupomosing9418 2008-11-19 16:53 |