Hi, I've been following the forum for a while and decided to register. I've seen some very logical and lucid posts rather than just opinion dropping - very cool. Debt levels in the US have reached heights that do not allow any more shifting around between groups - private, government, state, corporate, financials. Assets have risen in value due to increased debt and not because of increased productivity. To maintain current asset prices in the US productivity will have to pick as it is not feasible to inject more debt into the system. I see this as highly unlikely as it first has to increase just to be able to sustain the debt, and then a whole lot more. To this debt we will increasingly see pensioners' purchasing power decrease adding more weakness to the economy. What's the way out of an unsustainable debt burden? My thoughts on how some scenarios will play out: 1) Printing press solution: This solution seems likely as Ben Bernanke is very inclined not to allow any debt deflation similar to the 1930's happen. The Fed. will keep on buying various assets, pushing more USDs into the system. Salaries are not increasing fast enough to compensate for inflation (including gas, food). To be on the defensive side we can assume that price increases will slow down but not go down. With the trade deficit more dollars are pushed outside the USA. Inflation will start through counterparties overseas valuing the Dollar lower and lower, and not domestically (supply & demand). Once inflation is picking up the pace it cannot be stopped. The Dollar becomes worthless. 2 The Federal Reserve could hike interest rates to maintain Dollar status as reserve currency. That would impose impossible interest payments throughout the system. Government can't balance its budget. Financials will send higher rates onto the mortgage market. Defaults will ensue. I'm not really sure what happens to the Dollar in such a scenario. As I understand it money is created through debt, and the other way around is it is "destroyed"/removed if debt is paid back. But debt reduction is not possible because there is no money to cover the interest incurred on debt. I assume: Remove liquidity and the currency becomes more valuable How much will production (shrinking economy) in the US go down due to harmful defaults? If it is a race to the bottom - production and deleveraging (removal of liquidity) - what are your thoughts on the dollar? I think it's going to be negative but not as much as if the fed went nuts on the printing press. Are there more scenarios? Are my thoughts wrong on how the mentioned two will play out?
There are a lot of scenarios. The main concern is how China will react. That will determine the real course of the situation.
A lot of economists (old school) would claim the situation is a liquidity trap. You may want to look into what that means on an economic level and the limitations it forms for the government.
1 Make sure middle east exclusively excepts dollars for oil through military power. 2 reassure through military power middle east continues to by treasuries with oil profits. 3 fund and foment colour revolutions, civil wars, terrorists, NATO bombing, To destabilise areas around oil producing nations, scaring the price of oil up. 4 under the cover of terrorism use drone bombing to destroy oil infrastructure, who's money is not being recycled back into treasuries. to increase demand for treasuries 5 use peek oil to scare prices up = more money for treasuries. 6 retaliate against any country talking down dollar by conveniently finding "terrorists" in said country. Unless said country is too powerful and untimidated for direct attack. Then use covert means to start opposition of government to weaken it. Also destroy said countries economic alliances through same methods above. 7 Try to destroy any economic activity outside the dollar (Libya) The same playbook that gave us the oil shock of the 70s just in expanded form. Kissinger assured both sides of yom kipper that U.S. would support them.What do think we have the CIA for? You would think it would be pretty obvious by now
http://www.creditwritedowns.com/2011/08/will-the-world-still-buy-us-debt.html I thought this was pretty interesting. It is not whether China wants USD, it is whether they want to keep selling to the US. If they sell goods they have to accept dollars - and with those dollars buy assets of which treasuries are a dominant subgroup. I think a distinction is in place here - China wants to SELL to the US, not give things away. I don't see China stepping out of their current 1trn USD holding. At the same time I don't see them increasing their holdings for much longer either. At least not in the necessary size to keep the dollar afloat, but who knows.... Interesting times we live in. ^^ ps. read your blog Morganist. It's awesome - post more
Thank you for reading the blog. I have to agree with you about the situation in China. However I think it is more complicated than it looks. China is very dependent on US demand so they may buy more debt. Americans buy things Chinese do not. It will be a hard transition to get the Far Eastern economy influencing domestic demand. The certaintly of continued demand from US could maintain China's borrowing. If the Chinese have a spending change it may change. However the guarantee Americans spend will maintain China's interest in US debt. It's a weird world we live in and nothing is as it seems. There loads of things we are unaware of that influence things. In the long term I think the article is right. There are so many problems now. Oil shortages, middle east unrest, transition of wealth to far east, fewer resources, higher population etc.
There are really some kind of scenarios like you but all of which really depends on the situation. You may have to look into what that means on an economic level and the limitations it forms for the government.
I was thinking roughly of what kind of scenarios can unfold. Obviously details are almost impossible to predict. I'm not sure there are tons and tons of ways it can unfold. Key participants will be government, the American people voting in the next election, Fed, China, IMF/world, the various states, some more. If we are correct that economic activity will slow down even further (into recession) then the mentioned parties above will act reactionary and not in a proactive fashion, which limits options. The way I see it is all non-US parties can only decide on how much debt to hold, whether or not they use the US dollar for trade/reserves. That should affect how long the debt/structural deficit problem can be postponed. The stars if this drama will only be the US gov/people.
The only solution is a gradual devaluation of the dollar. I know American citizens don't want to see it because it kills their savings and purchasing power, but get used to it.
I don't think there are any more problems now than there ever was or ever will be. It's just that the information age brings everything to light to everybody. Think back 100 years when the main source for news was a newspaper. I'm sure all kinds of shitty things were going on in the world - you just didn't hear about them in your local daily newspaper. The internet has changed the world permanently.