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velochat
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Serious topic

Post by velochat » Mon Dec 06, 2004 5:41 pm

Of course, someone will say the PI is liberal, blah blah blah, but even the most partisan bushistas must be wondering about our future a la the points in this piece:

Our Place in the World: U.S. mortgages its sovereignty Friday, December 3, 2004

By KENNETH H. TORP
GUEST COLUMNIST

The official philosophy of the government presided over by George W. Bush views the United States as standing outside of history -- unfettered by traditional forces that dictate the rise and fall of civilizations and immune to the limits imposed on great powers by the broad sweep of historical trends.

According to this view, the United States is unique, and uniquely good, and constitutes a singular exception in the history of mankind. It can thus exercise its superior power unilaterally without worrying overly much about long-range consequences or the views of other nations. Never mind that "exceptionalism" requires a breathtaking ethnocentrism; it is, quite simply, unsustainable in the context of a global market economy.

The international financial system, for example, doesn't give a fig for U.S. "exceptionalism." Rather, it operates on its own set of principles that are resolutely market-based and transnational.

The "exceptionalists" may believe they have repealed history but the laws of economics are not so easily ignored. A chesty Vice President Cheney tells us that the United States will never ask for a permission slip before acting in its own self-interest. But even a cursory look at U.S. fiscal and trade numbers leads to the conclusion that the economic policies of the Bush administration already have reduced our economic sovereignty. The "exceptionalists" are simply whistling in the graveyard.

Curently, the U.S. fiscal and trade deficit is about $600 billion, or 6 percent of gross domestic product. Virtually the entire deficit is structural, not related to cyclical economic ups and downs. Debt held by foreigners totals $2.6 trillion, or 23 percent of GDP. Economists at Goldman Sachs calculate that this figure will exceed 60 percent by 2020. Most of this debt is now held by foreign central banks in the form of Treasury bonds, as opposed to stocks held by private investors.

The United States now is consuming three-quarters of the world's entire surplus savings. If the Bush plan for privatizing Social Security becomes a reality, the transition cost will require either spending cuts (highly unlikely) or additional borrowing (more likely) of between $2 trillion and $3.6 trillion over the next 10 years. One immediate result of all this red ink is that the dollar has lost half its value relative to the euro since 2000 and some economists expect it to decline another 20 percent to 40 percent. Former Fed Chairman Paul Volker recently stated there was a 75 percent chance of a currency crisis in the United States in the next five years.

The United States may be "exceptional," but international bankers are unimpressed. When you owe as much as we do to foreign creditors, sooner or later they will call the tune and we will be obliged to dance. Our foreign creditors don't even have to call their loans to bring on the ultimate day of financial reckoning. All it takes is a sharp decline in their willingness to finance further fiscal profligacy. Interest rates will be forced up, bond prices will nosedive and interest-rate-sensitive industries will feel the pinch, especially real estate that is probably overpriced anyway. A rapid contraction of U.S. economic activity is far from unthinkable, and with it a worldwide reduction in trade, investment and economic growth.

With the United States barely able to debt-finance the war in Iraq, our foreign creditors are not likely to foot the bill for another controversial U.S. military operation. In other words, the ability of the United States to defend itself against the next (real) threat is severely circumscribed by the Bush administration's ideological commitment to tax cuts and its refusal to exercise even a modicum of fiscal discipline.

It is, of course, altogether possible that placing some restraining power over U.S. foreign adventurism in the hands of non-U.S. central bankers is not all bad. But in the long run, the wisdom of mortgaging a substantial share of our sovereignty to foreign creditors may constitute one of the largest blunders of U.S. history.

The staggering irony here is that the most bellicose administration in recent history on issues of international cooperation is likely to bring about the sharpest curtailment of foreign policy sovereignty by handing veto power to the very same international players it so routinely snubs.



--------------------------------------------------------------------------------

Kenneth H. Torp of Seattle is a consultant in international public finance. He is also a retired U.S. foreign service officer.

© 1998-2004 Seattle Post-Intelligencer



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Post by El_Gato » Mon Dec 06, 2004 5:53 pm

Sounds serious.

Um, just a question: What are all those foreign bankers going to do when/if we miss a payment? Forclose? Invade?

Just curious...


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Post by SonomaCat » Mon Dec 06, 2004 6:10 pm

El_Gato wrote:Sounds serious.

Um, just a question: What are all those foreign bankers going to do when/if we miss a payment? Forclose? Invade?

Just curious...
That article was really interesting to me personally, as a large part of my job is dealing with my company's foreign currency exposures. As a part of that, I get about 20 emails per day from different banks with all of their experts' analysis of the movements in the fx markets. There are all sorts of interesting sub-topics that we could expand on relating to our deficit, the future, trade implications, and the current rate at which the USD is getting crushed in the currency markets. In short -- right now is not a good time to travel overseas -- it's way too expensive for our little tiny US dollars these days.

If we ever told the world that we couldn't pay on debt we had issued, the value of our debt would plummet. As market interest rates are essentially pegged to the value of our Treasury bonds, our interest rates would skyrocket, and we would see hyperinflation, similar to what Brazil, Mexico and South Africa saw in the past. The value of everything we owned would dwindle rapidly, and we'd all be po'.

It would be bad.

Right now, there are some interesting elements at play in the markets that are keeping the dollar from falling even further. In general, many/most other countries like to see the USD strong. Since the US is the largest consumer in the world, they would rather that their own currency was relatively cheap as compared to the USD so that their exports to the US would be affordable and competitive in US markets. Japan in particular relies on exports to the US. Japan, as well as the EU, have been buying USD and Treasuries to try to artificially prop up the USD, which they hope will help their exports to the US. This foreign investment has kept our interest rates artificially low.

Guess who benefits most from this? China. The Chinese Yuan doesn't play by the same rules as the rest of the world, and they peg the value of the Yuan directly to the USD, as opposed to letting it float according to its market value like the rest of the world. So when the USD drops, China still maintains its ability to export competitively into the US as their currency moves right with the dollar.

An interesting article I read summarized the triangle between Japan, China and the US like this: Japan buys tons of US Treasuries to prop up the dollar to try to help their own exports. The dollar still drops, but our interest rates stay low thanks to the Japanese. This makes it easier for US consumers to borrow and spend, which we are really good at. We then go to Wal-Mart and buy stuff from... not Japan, but mostly China, due to their USD-pegged Yuan. So Japan spends a ton of cash, but it just ends up benefitting the US and China. It sucks to be Japan right now.

Oh, and we need to get rid of our deficit... ASAP.
Last edited by SonomaCat on Mon Dec 06, 2004 6:11 pm, edited 2 times in total.



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Post by velochat » Tue Dec 07, 2004 9:13 am

I'm no international banker, but I can conjecture these conclusions:

Things from overseas will cost more (we don't make much here), except from China.

A larger portion of our taxes will go to pay interest to foreign investors, gradually diminishing the portion that does good things in the US. If we go farther in debt, the risk to finance our debt will go up which will mean interest rates must go up. More money invested in our debt will mean less invested in business ventures.

The hypothetical plus side to weak currency is improved trade deficit, but what we produce here is unlikely to ever turn the trade deficit in our favor. If we want to keep exporting our intellectual creations, we need to make it easier for the world's brightest people to come here and study and do research and create things for us; this is another way that we are losing the "war on terror".

Maybe economics don't matter anymore, as some try to convince us, but I'm guessing that, as in the physical world, every action causes a reaction and someday we have to pay back our loans.



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Post by Bleedinbluengold » Tue Dec 07, 2004 12:40 pm

http://www.gold-eagle.com/editorials_04 ... 20304.html

Here's an opinion on the subject. This is a gold bug site, but if you can see past that issue, there is some really good stuff being written at gold-eagle. And I must say that a lot of the editorials in the late 90's on this site nailed the stock market bear market that started in spring 2000.

These guys are predicting the same thing in real estate. Editorials, like the one above, also say that there is a bubble in the bond market, which will end orders of magnitude more badly than the stock market bubble.



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Post by SonomaCat » Tue Dec 07, 2004 1:11 pm

Thanks for that link, BBG. All of the various theories like that are really interesting, and I guess any of them could play out to be true. I am a bit more skeptical of the doomsday scenarios (especially from sites, like you noted, that have financial incentive to create doomsday scenarios), but all of the moving parts in the economy really make it anyone's guess, so we are best served to consider all of the available theories.
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Post by velochat » Tue Dec 07, 2004 5:30 pm

Here's another interesting article, from New York Times:



--------------------------------------------------------------------------------

December 7, 2004
OP-ED CONTRIBUTOR
Don't Let the Dollar Take the Fall
By JEFFREY E. GARTEN

ew Haven — AS the dollar continues to sink against the euro, the yen and other currencies, the conventional wisdom is that there is little choice but to allow it to continue to fall.

America's trade imbalance can be corrected, the current reasoning goes, with a much cheaper dollar - perhaps 30 percent cheaper than it is today. The idea - supported by Treasury Secretary John Snow and Alan Greenspan, the Federal Reserve chairman - is that this would raise the price of imports for Americans, who would thus buy less from abroad. A cheaper dollar would also supposedly allow us to sell more to the world by making our exports less expensive.

Here is what's wrong with this analysis.

A falling dollar is unlikely to curtail imports as much as hoped. It is more likely instead to act as a consumption tax. About one-quarter of the United States import bill arises from oil purchases, which are priced in dollars. A rapidly depreciating dollar thus means lower earnings for OPEC producers. In response, the cartel might well raise prices. Goods from Asia, especially China, account for at least another 25 percent of our import bill. Because these computers, machine tools, TV's and toys are essential to our work and lifestyle, chances are that we will still buy them, even at higher prices.

Nor will a cheaper dollar encourage domestic production that can replace imports, as some argue. Auto parts, for instance, are increasingly produced in Mexico and other developing nations. These plants, part of a highly specialized global supply line, are not likely to be replaced by suppliers in the United States just because of temporary currency movements.

American exports, meanwhile, will not be spurred as much as most forecasters hope. Because currencies' values are relative to one another, the lower the dollar gets, the higher the euro and yen rise. As the currencies of Europe and Japan strengthen, the exports of these nations will become more expensive. That could easily translate into slower growth in those already slow-growing regions - and less money to buy our exports.

What's more, with the exception of agriculture, fewer American products are sold from our shores. Increasingly, they are sold by American subsidiaries overseas. While big American companies still export billions of dollars' worth of goods across the Atlantic, they sell three to five times as much from their European-based operations - to countries in Europe. A lower dollar won't have much effect on those sales.

The problem with the administration's devaluation policy is that it doesn't treat the root causes of America's economic imbalances. Our need to borrow so much from abroad is caused by our enormous consumption and our anemic savings. Today, Americans save just 0.2 percent of their disposable income, practically the lowest level in 45 years. Since we have so little savings to finance capital investment, we borrow from savings pools abroad. Our government, too, needs foreign creditors to invest in Treasury securities, to finance its escalating budget deficits.

Another trade issue not addressed by dollar devaluation: the need to sharpen our global competitiveness. In an advanced economy like ours, price should be less of a selling point than the quality and sophistication of a product. This isn't going to happen unless we improve the fundamentals underlying competitiveness - our education system and labor-force skills. A devalued dollar also does not lower health-care costs - costs so high that they encourage American employers to move operations to countries where governments often pick up the insurance tab.

Traders churning $2 trillion daily in currency markets know that if the United States relies on a cheap dollar alone to correct its trade imbalance it will push the currency down fast and for a long time - because the benefits will never quite match the predicted expectations.

This is a one-way bet for speculators. Already, rumors are rampant that several central banks with significant dollar holdings may diversify into other currencies. Hedge funds and other speculators may be moving in. If momentum to sell dollars gathers steam, it could lead to a dollar plunge, a global financial crisis and deep worldwide recession.

The dollar may well be overvalued now. But rather than just talking the currency down, Washington should try to pursue a formal agreement with Europe, Japan and China that addresses not only currency realignments but also the domestic policy changes needed to back them up.

A model for this is the so-called Plaza Accord negotiated by the Reagan administration with Germany and Japan in 1985. Then, as now, the United States was running large trade deficits and wanted to devalue the dollar. But rather than talking down the currency or letting it fall on its own, President Reagan's team got key trading partners to share the burden of adjusting policies to correct the imbalance. It worked. America's trade gap slowly narrowed, and foreign lenders did not demand significantly higher interest rates on Treasuries. If Washington negotiated a similar accord today, countries like China and Japan could slow the dollar's slide by revaluing their currencies. The pact could also involve policy commitments to support the currency realignments.

For example, rather than just assert that economic growth will reduce our budget deficits, the Bush administration might postpone or trim permanent tax cuts. It could also agree to partly privatize Social Security only after creating a plan to finance the $1 trillion to $2 trillion in transition costs without deepening the deficit. It could announce measures to improve our export performance - starting, perhaps, with more support for certain research and development programs and a plan to lower health-care premiums for employers by offering reinsurance for catastrophic-illness costs.

For their part, European nations could pledge to accelerate deregulation to further open their economies and become bigger importers. And key countries could agree to intervene in currency markets to keep the dollar's decline gradual and orderly.

A great power does not debase its currency - a currency around which most global commerce revolves. It does not take its hand off the tiller, as if the market bears all responsibility for global financial stability. To fix the problems that underlie huge trade imbalances, it uses statesmanship - at home and abroad.


Jeffrey E. Garten, dean of the Yale School of Management, held economic and foreign policy posts in the Nixon, Ford, Carter and Clinton administrations.



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Post by SonomaCat » Thu Dec 09, 2004 3:13 pm

Speaking of our national debt, Bush confirmed that he is against raising taxes for Social Security, and apparently wants to issue more debt to cover the cost instead. Brilliant.

http://money.cnn.com/2004/12/09/news/bu ... tm?cnn=yes

I'm really surprised that they just don't raise the FICA max (which is at about $85K right now, I think). Anything earned over that isn't subject to FICA. I'm not normally a big fan of raising taxes that could one day actually affect me (especially since I am at the top of the "no tax breaks for you" list currently written into the code), but unless we are going to increase the retirement age or start limiting benefits, it seems really irresponsible to refuse to increase the tax base to cover the costs.

Of course, politically, it easiest to say "benefits for everybody" while also saying "tax cuts for everybody" and/or "no new taxes" in the same breath. As long as a person isn't concerned about the government running in a fiscally responsible manner, then it's hard to vote against that guy.

I'm still finding it funny that Bush campaigned the first time under the idea that tax cuts were needed to give the surplus back to the people, but then when the economy tanked, tax cuts (regardless of whether they were truly stimulative in nature) were the only answer to the problem. Those two circumstances may well be true philosophically in many people's minds, but is it just me, or does it seem like "tax cuts" are always going to be the only answer that Bush will come up with? If one can never even consider raising taxes, then they aren't makng their policy decisions in a rationale manner. Clearly, we can't just keep spending more and more while continuing to lower taxes and refusing to consider any kind of tax increases.

I really hope that we start hearing some talk from this administration VERY SOON about ways to reduce the deficit, even if it means they give up their plan to make their tax cuts permanent. At some point, don't you have to put the good of the country above one's cult-like obsession with lowering taxes? Lower taxes when we can afford it, but don't dig us a big-ass hole just to make some twisted political statement.
Last edited by SonomaCat on Thu Dec 09, 2004 3:14 pm, edited 1 time in total.



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Post by velochat » Thu Dec 09, 2004 3:58 pm

I understand that there is not a major problem with social security, other than that we're spending it to make the debt look smaller than it is. If we want private SS accounts, we need to raise more money for them. Oh, I forgot, we only need to print more money.

Paul O'Neill was on the Daily Show last night. It was pretty good. No wonder Jon Stewart is taken more seriously than network news by a large portion of the population.

http://seattlepi.nwsource.com/horsey/print.asp?id=1124



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Post by Bleedinbluengold » Thu Dec 09, 2004 8:32 pm

The problem is that if the Fed doesn't continue to increase the money supply over the long term, the economy will be even worse off.

At www.federalreserve.gov, go to statistics and look for H.6. That will give you the historical M1, M2 and M3 data.

You will note a significant dip in M3 leading a stock market decline, which leads an economic downturn...interesting.

As you can imagine, gold-eagle.com has numerous editiorials about money supply, the federal reserve and alan greespan....interesting stuff.

I have no answers.
Last edited by Bleedinbluengold on Thu Dec 09, 2004 8:33 pm, edited 1 time in total.



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