More Depressions Like This, Please
This TCS article looks at the economic numbers for Bush's first term. The conclusion:
So, when you add it all up, we now have accelerating: Job growth Wages Consumer net worth Stock valuations (up 50% from their post-recession lows) Home ownership and prices GDP Frankly, with depressions like these, who needs expansions?
posted by Dave Justus | 1/13/2005 11:04:00 AM
8 Comments:
...until the Chinese foreclose on the mortgage...
That wise Kiwi speaks truth . . . China has tied their currency to the dollar and, unlike the EU, are unaffected by the lower dollar. We may be screwin' the EU, but we're setting up the Chinese.
On a cheerful note, I agree the economy is looking good. In my narrow window, I never did see the doom and gloom the MSM was spouting last year.
hmmm, if the chiness is smart they when they begin to unhook their currency from the US, they will allow ragnes of trading instead of just opening the door wide open.
Acutally, i was reading how some people might start considering the euro as the reseve currency instead of the US dollar.
The left complains about the dollar being low, and the complain about us being a world power. They can't really have it both ways.
Cubicle, it works like this.
Under the GWB theory of economics, it is a good thing to spend more than you earn (that is what a deficit means) because it encourages people to invest in the loans that your country is taking out to pay for... you get the picture.
At the moment, all of these loans are at very low rates of interest - between 1% and 1.5% p.a. Nothing wrong with that either, so long as the investors are happy to invest at those rates.
Now, if you are investing in company bonds, what is one of the most important things that you should look at? Well, two things really.
First is whether the company is going to be able to cover both the interest and eventual repayment of the total it owes.
Second is the risk of the company not being able to pay its outgoings in the long term. The higher the risk, the greater the return that can be expected.
So there we reach the world of reality. At present the US external deficit is running at some 5.8% of GDP. With the low interest rates that is not a great risk. But wait there is more.
Last month The Fed began talking up the expectation of interest rate increases on Government borrowings - the "cash rate" as it is known. An increase has been expected for about twelve months now, nothing new.
But wait there is more.
An increase in interest payments, especially to overseas investors, increases the total external deficit, increases the amounts to be borrowed and so it ratchets upward.
At some point, it has to be stopped.
THAT is when the bond holders are likely to call up on their investments.
THAT is when the value of US Government bonds could potentially reach the equivalent of junk bonds.
THAT is a scenario that has had the international finance scene clenching their anal muscles for about the past twelve to fifteen months.
Like to bring that scenario to its logical conclusion?
The conclusion? We'll probably be invaded by the Swiss . . . I don't have the 'sky is falling' attitude since our election cycle should prevent a catastrophe. Besides, we've heard this for the last 25 yrs.
However, I'm still waiting for Bush to wipe out the veto pen for the first time!!! Geez, boy, just say no.
Even better news for us Americans is that we can still be sure that if the U.S. economy fails in the doomsday scenario Probligo describes the rest of the world will suffer even more :) When the U.S. sneezes, the rest of the world catches a cold.
I think his scenario is pretty unlikely and he is missing a couple of points about world monetary exchange and finance.
Here is one thing to remember though, that my dad (a banker) told me when I was little.
If you owe the bank a hundred thousand dollars the bank owns you.
If you owe the bank a hundred million dollars you own the bank.
:)
Dave, I recognise the impact that a US currency collapse might have. Hence the crossed legs in the financial world.
One point to consider...
About ten or so years back, not long after NZ went from pegged to fully floated currency, there was a "blip" in the currency value over a period of about a week. A short term climb of about 5% in the value NZD:USD was followed by a sudden sell-off and a fall equivalent to 4% down on the start value. Nothing was really thought of this until the Reserve Bank (in the personage of none other than Brash Donny) very seriously announced that the currency had been subjected to a "peg and buy" speculation by three individuals. Unofficial estimates at the time speculated that some $USD50 million was involved and a profit in excess of USD10 million made overnight.
Yep, that's part of the risk of putting your currency on the world market.
The point of this little parable is that these gents had the money, the economic clout, to undertake such a speculation.
Now consider such a "movement" on the scale of the holding of US Bonds in China.
If, as is speculated in this morning's paper, the Fed sets an increase of 0.5% in the bank rate on Thursday this should have little impact upon the currency. But there will be some movement as a result. The likelihood is downward after a short upturn.
There will come a point at which the cumulative loss of principal value (through depreciation of the USD against the Yuan) will exceed the increased return. At that point there will be heavy selling of the US Bonds, and consequent heavy selling of USD. All coming largely from the same place - China and the other "eastern" nations.
There is the sneeze, as you put it.
The ROW catching the cold would be consequent upon US Treasury reaction and defensive measures.
One thing is certain, the US Fed could not, does not have the funds to, support the currency in those circumstances or to that extent.
Hands up those who remember the demand-led inflationary times of the 1970's. Nothing!!
Hands up those who remember the 1929 bank crash and the collapse of Wall Street. Getting close!!
But then who cares!!! It is only money!! We can trust GWB to do the right thing!!! Look at the economy steaming along. Jobs being created right centre and left, but mainly to the right (those states who backed George). Optimism is rife!!! Yep, true. Everyone believes George!!
Yeah, right!
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