US Debt Problem

[minimoke]

So it looks like US leaders have "solved" their current debt problem. I've no idea how much US$14T is but this kinda gives an idea.
http://usdebt.kleptocracy.us/

[OldRider]

A quick check on google, then will the calculator handle trillions, it did, hope my maths is correct - you check.
I got US debt at US$45,600 per person, not too bad? just US$182,400 for a family of 4,
like having two mortgages on the house to pay off.

What's the comparison with NZ?

And if China owned all this debt it would equate to $US10,514 for each person in China

No wonder Chinese growth statistics are so high
Good if you are in the ruling class there!

Maybe just as well China doesn't hold all the US debt

[Lizard]

On the good side, at least the US mostly only owe it to themselves - their net international investment liability is $2.4T or about $7,700 per person.

By contrast, NZ looks to have gross public debt of $17,500 per person but net international liabilities of $36,100 per person.

[Major von Tempsky]

You'll find the figures are theoretically more scary than real. Some of the assetholders will be US government arms and pension funds and universities and savings banks who are looking for a safe holding to diversify and rely on the income. When their investment matures they'll roll it over. Going on previous patterns that's probably over half. And some of the overseas holders will be in the same category, i.e. there is no call to suddenly pay off all the US debt

[POSSUM THE CAT]

WHICH Trillion are we talking about as A US trillion is smaller than an international TrillionA US one has 12 Zeros an international one16 zeros

[Lizard]

I think we're talking US Trills, but I'm not sure about the $ values - I think I have the US ones in USD and the NZ ones in NZD.... and the Pinot Noir in L. :)

[craic]

This mornings New York Times has a good article, mainly on the overall mess which they see as a European problem, mainly. The market drop is now graded as a"correction" and is expected to continue down for a couple of weeks. I am fortunate enough to be cashed up but how safe is cash in the context of a Direct Broking account?

[POSSUM THE CAT]

craic As safe as an ANZ bank account

[duncan macgregor]

This mornings New York Times has a good article, mainly on the overall mess which they see as a European problem, mainly. The market drop is now graded as a"correction" and is expected to continue down for a couple of weeks. I am fortunate enough to be cashed up but how safe is cash in the context of a Direct Broking account? being cashed up might not be as safe as you think in the eventual end of this turmoil. Cash after all is only a promise to pay from countries that are heading into bankrupsy. Most western countries are living in spiraling debt with polititions refusing to make the hard calls simply because if they do they will be out on their ear. The only safe investments are material investments that hold value, when the monetry system collapses. My old mate PHAEDRUS has the right idea fleeing the market, right at the start of what will end up a complete world wide monetry collapse. Pay the house off ,buy a farm, batton the hatches, the worst is still to come. Macdunk

[craic]

I already have the house,the hatches are well battened down. My cash is NZ cash and I will be paid because my position is stable and relative to all other New Zealanders. Its still a hard winter and I have plenty of wood to sell and a crate or two of the hard stuff to barter. I picked up a brand new four stroke generator last month for $150 and food is stockpiled for the next big Napier earthquake. I was born and raised in a two roomed cottage with no power, sewerage or running water or any other facility so I know how it works when the worst comes. I always remember one or two individuals in that society who had a roll of notes in their pocket. Always ready to buy a horse for half what it was worth, always ready to buy a pint for someone if there was something in it for them. But thats not going to happen here - Shares will continue to fall and I will buy back in when I think they are close to the bottom. I will probably stuff it up but it doesn't matter. In the morning I will get up and go to the funeral parlour and read the tribute or Ode as it is called for some old soldier who has passed away and I will include the words "to preserve the peace and prosperity that we enjoy, borne of their sacrifice".A pint afterwards in the RSA and then home to see what sort of a mess the market is in.

[POSSUM THE CAT]

Remember the old proverb If somebody owes you $1000.00 he has a problem if he owes you $100,000000.00 you have the problem

[Lizard]

Fear is good. It is fear that is needed to make the hard decisions possible.

Given a choice between monetary collapse and restructuring/writing down debt, then agreements will be reached that reduce debts to manageable levels. The beauty of paper money is its flexibility. Financial restraint may force a focus back on simplifying life to enable greater productivity and even succeed in putting a temporary floor under the bottomless pit of expenditure on butt-covering and risk avoidance.

This is the real period of adjustment that we've all known was going to be needed one day. I would say "don't be scared", but the more fear there is out there, the faster we get to the solutions and the stronger the platform that is likely to be created.

[duncan macgregor]

Liz, I disagree that fear is good. Fear drives people to withdraw from the market placing money in to unproductive material assets that hold its value giving hoarding gold as an example. The money system as we know it must one day collapse. It is starting to look like sooner than later. I always thought property was by far the safest asset to hold which proved to be right for me up to this moment in time. If countries were individuals bankrupsies and mortgagee sales would be happening all over the place. People want everything now, with I deserve this, and I deserve that attitude, forcing Govts to borrow willy nilly or get ousted at the next election. Macdunk

[peat]

This is the real period of adjustment that we've all known was going to be needed one day. I would say "don't be scared", but the more fear there is out there, the faster we get to the solutions and the stronger the platform that is likely to be created.
And the sooner we can get to a price where equities are a bargain ;+)

[Lizard]

Peat, you might like this one if you haven't seen already:
The Economist - "The Great Repression" (http://www.economist.com/node/18834259?story_id=18834259)

[boring]

Let's face it ... it is getting close to 2012 so we are going to see increasing turbulence ...
How DID those Mayans know !!

[craic]

The Mayans started it all. They "gave" all their gold to the Spanish and the Spanish spent spent the next few hundred years screwing the Americans through Columbia and Mexico and now the Spanish have run out of oomph and are about to implode. All this come to a head by 2012 as the Mayans predicted. We Irish avoid the worst of it through our strong Australian connections.

[Major von Tempsky]

Other people say the Mayans did not actually predict the end of the World in 2012, it's just that 600 years ago they didn't bother working out their calendar more than 600 years forward at the time.
Yawn! I can't be bothered working out my calendar more than 10 years ahead - does that mean the World will end in 2021?

[boring]

It's an interesting theory MVT, but I think you have to be part of an extinct civilisation before anyone will take your predictions seriously. There must be an element of "mystique" before it gets any legs.

[Lizard]

China July Exports Hit Record (http://uk.finance.yahoo.com/news/China-July-exports-hit-record-reuters_molt-1227986673.html;_ylt=AvP2LGym4kt5GdhwCx4Gfi7Sr7FG; _ylu=X3oDMTE4M251djRuBHBvcwM2BHNlYwN5ZmlUb3BTdG9ya WVzBHNsawNjaGluYWp1bHlleHA-?x=0)

The other half of the US Debt Problem must surely be the China Surplus Problem. I mean, simplistically, we can't all run balanced budgets while China runs a massive surplus?

Okay, so we can find ways to chip away at accumulated debts with the restructuring/repression/inflation tools, but the more challenging part is to stop running up new debt. The theory of governments running balanced budgets is fine, but if everyone tries to do this at once while some countries attempt to run surpluses, then it seems to me that either the private sector will have to soak it up by becoming more indebted or the entire economy will have to contract in a downward spiral that helps no one?

Surely until China actively works to become part of the "balanced budget" solution (no matter how reluctantly), then the path to healthy credit markets looks more like a wrong-way walk down a travelator.

(Just found an article where Ben Bernanke outlined in Feb what is really needed from China:"US Fed Chief Says China Monetary Policy Counterproductive" (http://www.voanews.com/english/news/asia/US-Fed-Chief-Says-China-Monetary-Policy-Counterproductive-115678469.html))

[belgarion]

You are correct Liz. Problem is tho that the Tea Party bunch are not economists - more religious fanatics.

Over time tho, and its been quite some time, the inbalance becomes a cause for concern for both the surplusee and deficitee. I'm not aware of any historical precedent where this has gone on for longer than 40 years without ending badly and certainly never on the scale that the US is doing. There have been precendents on very small scales longer than 40 years which have ended okay, mainly due to deficitee growing their way out of debt or being forgiven of the debt. And, there have similar or even larger scale imbalances to the US's current one that have lasted for a short time which have corrected themselves with sensible fiscal policies (something the US simply can't agree on due to religious dogma).

Renmimbi up and USD down and the imbalance will correct itself fairly quickly (5 years would be a good period so that shocks are minimised)

[Major von Tempsky]

Not so Belge.

The debt everyone is talking about in the USA is Government debt.

What has to be done is for the US Government to move into surplus, cutting its expenditure and raising revenue, while at the same time the private sector is stimulated into expansion and job creation by cheap credit (thank you Federal Reserve for the practically zero interest rates for the next two years) and some quantitative easing (new term for printing off new money) plus the fall and fall of the US dollar to stimulate exports and discourage exports. Granted this last part would be easier if the Chinese moved to floating exchange rates.

In this situation of needed stimulation of the private sector, raising Government revenue is not a good idea and hence the Tea Party actually have most of it right.

The part of it they don't have right is that they don't understand macroeconomics and in particular the operations of the Federal Reserve and they hate the Fed Reserve. And people like Michele Bachman, Ron Paul, Rick Perry don't have any economics education and hate the Fed Reserve because they think it will create inflation and lower the US dollar.

However given that the Fed Reserve is independent and beyond their power then the Tea Party have broadly the right ideas for the current situation.

Reflect also that Noam Chomsky on the left is a complete economic ignoramus and doesn't understand either and wants to bring back full blown protectionism, the ultimate recipe for another world-wide Depression.

[POSSUM THE CAT]

MVT suggest you edit the above post how can you stimulate exports & discourage exports at the same time

[Major von Tempsky]

Well spotted - its a typo and it won't let me edit it now.

Should be "the fall and fall of the US dollar will stimulate exports and discourage imports."

[belgarion]

In this situation of needed stimulation of the private sector, raising Government revenue is not a good idea and hence the Tea Party actually have most of it right.

Huh?

The great thing about govts is that when the recieve revenues, they spend it. A re-allocation of wealth if you like. By taking from those who least need it, and allocating to those that do (unemployed) through capital creation programs (e.g. repairing US's badly worn out infrastrcuture) is a tried and tested formular for kick starting an economy. This has the effect of increasing the velocity of the currency in circulation without having to resort to printing mony. Even Key knows this and thats what NZ is basically doing albeit on a smallish scale and were borrowing to do it.

Krugman takes an even more extreme poistion (actually he's being humorous at the expense of polititians inability to spend wisely) which say it doesn't matter where the money gets spent, just so long as it gets spent fast and the unemployed are guaranteed to do that.

Raising revenues (taxes) to pay back debt at this stage would be daft and nobody (except some extremists in the Tea Party, Rep and Dem Parties too) are suggesting this.

[biscuit]

Raising revenues (taxes) to pay back debt at this stage would be daft and nobody (except some extremists in the Tea Party, Rep and Dem Parties too) are suggesting this.

I don't think the tea party are advocating raising taxes!

[Lizard]

Renmimbi up and USD down and the imbalance will correct itself fairly quickly (5 years would be a good period so that shocks are minimised)

Well it looks to me as though, rather than moving to a more balanced budget position themselves, China will encourage the development of a Eurobond to pour their reserves into. So once Europe has sorted out the structure for this, we perhaps get the same debt-funded boom in Europe as a whole, rather than just the European periphery? Not sure if the Germans would let this happen though.

[belgarion]

Hi Liz, Yes - there's a lot of talk about where the Chinese are putting their reserves (or will be putting their reserves) and I think a Eurobond is inevitable.

[Lizard]

John Mauldin providing access today to an interesting article by Horace Brock:
http://www.ritholtz.com/blog/2011/09/res-politica-versus-res-economica/

Two parts to this article - the basis of the science of politics and the implications for this in redressing China's role in global imbalances. An excerpt from the latter part belongs on this thread (although is better still if read in the context of the whole article).

Here is what this perspective says regarding bargaining with China at present:

First, recognize that the concept of retaliation as being “protectionist” is nonsensical when China (and Asia, more broadly) admits to having been mercantilist for decades. We reiterate a point made in previous reports: Under true capitalism, there could not exist a $2 trillion cumulative US trade deficit with China, much less a cumulative $4 trillion deficit with Asia as a whole. For under true capitalism (no mercantilism, open capital accounts, transparency, and market determined currencies), these figures would be in the realm of $0 as a long-term average. Thus, for the victims of mercantilism to eventually rise up and protect themselves is not “protectionist” in any meaningful sense. Rather, it is a rational response to their victimization over decades.

Second, understand that the wrong response would be a piecemeal implementation of specific industry-by-industry tariffs on a nation-by-nation basis. Regrettably, this is the uncoordinated strategy that is now being adopted.

Third, implement the right strategy as dictated by the logic of true multilateral bargaining theory. This would be a coalitional strategy implemented by all nations victimized by Asian mercantilism—a strategy taking proper advantage of all their coalitional muscle and threat power. More specifically, China (and certain other nations) should be told:

“We want you in the World Trade Organization (WTO). We welcome your economic ascendancy and the opportunity to trade with you. We are not going to offend you by imposing willy nilly tariffs on a case-by-case basis. However, you promised ten years ago that you would curtail trade in stolen goods and patents, yet your export of these has more than doubled since 2002. You also promised to open your capital account and deregulate your financial system, but progress has been extremely slow. Finally, you agreed that your trade deficit would be curtailed (primarily through a significant appreciation of the Yuan), but on a trade-weighted basis, the Yuan has not risen, and your trade surplus has mushroomed. This state of affairs cannot and will not go on.”

“While we are not going to retaliate tomorrow morning on a case-by-case basis, we are, as a group of nations that uphold the covenants of the WTO, now going to insist that as regards intellectual property rights and counterfeit goods, you have two years to achieve a —% reduction; as regards your closed financial system, you have three years to implement policies A, B, and C respectively; and as regards your trade surplus and your undervalued currency, you have five years in which to achieve a —% reduction in your surplus with us, and five years to bring about a —% increase in the trade-weighted value of the Yuan.”

“Should you continue to stonewall such reforms, then in two years, all of us will impose a 35% quota on all goods we buy from you. In four years, this will rise to 70%. And in five years it will rise to 100%. This is not an idle threat. We are joined in common purpose here to help you and to redress our own problems. If you do not cooperate and refuse to change, the impact of our joint strategy will be to reduce your growth rate from 9% to an estimated 5%—a growth rate that will put tens of millions of your workers out of work, create social instability, and threaten your entire banking system. Please join us in working out this problem so that we might all come out ahead. We have no desire to damage your economy. However, history makes all too clear that, the longer these excesses and imbalances go on, the worse the ultimate denouement for all. Today’s status quo must thus end.”

[elZorro]

Hi Lizard, the general idea there, seems to be that the Chinese are flogging IP from the western world. But many western companies are manufacturing over in China, or buying parts for their manufacturing, to increase their profits when sold in the local market. Larger companies also vigorously protect their IP, so are not affected.

I think the answer to all the international mayhem is for concentrated research into low cost energy sources that are largely carbon neutral. If energy becomes safer and cheaper (rather than the current trend) the world can fix a lot of its other problems. The US has run out of cheap energy, that's the problem, it's showing up as China's trading imbalances.

[Lizard]

Another good article on the fundamental problem of imbalances created through currency - the underlying problem that will somehow need to be corrected before we can all move forward again.

Protectionism Beckons as Leaders Push World into Depression - UK Telegraph (http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8802462/Protectionism-beckons-as-leaders-push-world-into-Depression.html)


Well, yes, this is now happening. Did anybody think about this when they unleashed globalisation with its elemental deformity, free trade without free currencies?
The self-correction mechanism is jammed. China holds down the yuan against the dollar through a dirty peg. Germany and its satellites hold down the D-mark against Club Med covertly through the mechanism of EMU.
This outcome in Europe is not deliberate (I hope); it is not a German plot; it is the unintended effect of a currency union created by ideologues against Bundesbank advice, and which has calamitous implications for German foreign policy and for Latin social stability.
My sympathies go to the hard-working citizens of Germany, Spain, Italy, Portugal, and Ireland for being led into this impasse by foolish elites.
A global system biased towards export dumping has had unhappy effects on the US, UK, and Club Med. These countries have faced a Morton’s Folk over recent years: an implicit choice between job losses at home, or accepting credit bubbles to mask the pain.
They chose bubbles


The risk – or solution? – is that the US will opt for a variant of Imperial Preference, the pro-growth bloc created behind tariff walls by the British Empire with Scandinavia, Argentina and other like-minded states in 1932. This experiment has been air-brushed out of history by free trade hegemonists.
One can imagine how this might unfold. North America would clamp down on dumping, at first gingerly, before escalating towards a cascade of Smoot-Hawley tariffs and barriers. Mexico and Central America would join. Brazil and Mercosur would find it irresistible because that is where the demand would be, and BRIC solidarity would wither on the vine.
By then you would have the US recovering behind its wall, while surplus states were recoiling from severe shock. Britain would face the moment of truth, offered salvation in the `Pact of the Americas’ or slow asphyxiation by trade ties to EMU’s deflation machine. Portugal and Spain would face the same fateful choice. This is how the EU might end.
Ultimately, America would get its way. Korea and the Asian Tigers would come knocking. The austerity brigade and mercantilists would be shut out until they capitulated. The rules of world trade system would be redrawn.


A US double-dip is not yet a foregone conclusion. America’s M3 money supply is last growing decently again at 5.6pc, which would in normal circumstances signal some recovery next year. The latest GDP and confidence data in the US have not been as bad as feared.
Ajay Kapur from Deutsche Bank said investors have to decide whether the market slump of recent weeks is a “panic like the LTCM sell-off in late-1998 that proved to be a great buying opportunity, or the first leg in what could eventually be a pervasive global recession. We believe it is the latter.”
He said the triple warnings from US leading indicators (ECRI, the Philly Fed’s 'Anxious Index', and the earnings revision index) all point to recession, while China is “probably over-tightening” into a global slump.
In Europe, policy is still on deflationary settings, with Italy and Spain having to tighten fiscal yet further to meet their budget targets. The European Central Bank is overseeing a collapse in real M1 deposits in Italy of around 6pc, annualized over the last six-months.
Michael Darda from MKM Partners said the ECB has made such a hash of monetary policy that nominal GDP for the whole eurozone may even start to contract.
That is astonishing. If correct, there is no hope of averting a debt spiral in Italy and Spain. Any such outcome will test the EU’s bail-out machinery to destruction within months.