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Discussion in 'Politics & Current Events' started by verybdog, Oct 26, 2004.
If debt is slavery, then Japanese and Chinese are our masters.
The Chinese have artificially pegged the yuan to the USD, which means we can't do the trick from the Reagan administration, when we borrowed expensive dollars and paid back with cheap ones. When the exchange rate gets adjusted to reality, there will be a hell of a shock to both economies. Debts are legal obligations. You either make the payments or you turn over US assets to Chinese control.
This might also explain why the democracy-loving Bush adminstration is supporting the "one China" policy and leaving Taiwan in the cold.
You sounded like the pegging happened last year...but it's not...no one was complaining (like using the word 'artificially' for example) 20 - 30 years ago...why is that?
Because it's not the same world and it's not the same economy.
Why is that relevant?
It's interestinig that you chose to use the word "relevant" [Personal attack]. Because, what happened 20-30 years ago socially, let alone fiscally, is no longer such. The world is a different place.
20-30 years ago, China was an economic backwater. They have emerged as an industrial power at an extremely high rate, now producing some 40% of the growth in global GDP in the past 12 months. Rigged currency exchange rates are fine for a short period of time, just like a little bit of debt at the right time is OK, but just don't make it a habit. The trade imbalance and the resultingdebt is creating a bubble, and it will need to go to its natural equilibrium point. The bigger the bubble, the harder the fall.
But you can't blame chinese for these trade imbalance and resulting debts, can you? The pegging is always there. It is the US government running up these twin deficits.
I don't blame the Chinese, so much as I recognize the Chinese have taken advantage of every economic opportunity. The USA has shifted from a manufacturing-based economy to a consumption-based economy. The Chinese are doing a good chunk of the manufacturing for our consumption. Hence we export dollars and they export finished goods. This gives us a hefty current account deficit, which magnified by the fixed exchange rate between the yuan and the USD. If the yuan were floated, the current account deficit would have an adjustment as the USD gets devalued relative to the yuan, and Chinese manufactured goods become relatively more expensive. For some crazy reason, both sides are happy with this.
In order to maintain the accounting equation, every year that the current account deficits exceeds the real growth rate of the US economy, we give a slice of our assets over to a foreign entity. Not a good idea, and that is the thesis of the article you posted.
Roel, what's your take on the future trends of interest rates in regards to the budget deficit and its effect on the US economy?
My analysis / prediction:
There are instabilities in both the purchasing power parity and the current account deficits between the US and our major trading partners. In 2005, I think we can see anywhere from a 10-30% decline in the value of the USD.
China will be under pressure from other central banks to continue increasing their interest rates.
The US will be in a situation where we need to attract foreign capital, or sell assets to foreign entities, in order to balance the accounting equation.
The drop in the USD will result in increased consumer prices and drop in demand. There is a 50/50 chance for a world-wide recession, lead by drop in US demand and by the sustained oil prices over $50/barrel.
US equity markets won't attract necessary capital, as the WW recession will stagnate our prices. Stocks won't appreciate adequately.
As a result we can expect more, higher interest rate corporate and government debt.
Conclusion: It would be prudent to expect an increase of 150-200 bps in 2005. If that doesn't happen, expect the USD to drop by 30% and stay weak for a good 5-10 years.
Roel, excellent analysis. If you were right on the money, interest rates would go up because of the deficit, and foreigners would soon stop financing of the US deficits; dollar would fall further and go down because of the recovery stalling and foreign capitals looking for opportunities outside the USA. Foreign direct investment inflow would greatly reduced. Compounding with the oil crisis, another bear stock market, job loss and all that, the future is clouded.
What's your idea of reducing the deficit with minimium damage to the economy? It seems to me that some drastic messures must to be applied in order to get out of that dark hole. the ultra low interest rates won't help in that direction. The place right now is flooded with cheap money which eventually would lead to big inflation, which would in term kill the economy, otherwise, deficits would be further out of control.
I know little about government fiscal policy. My instinct is to cut the size of the federal government. They piss away far too much money. Part of me just wants to see the feds reduced to defending the borders, upholding the Constitution on our territory, and maybe something of a social network. Pass most of the rest of the revenue and spending to the states. I'm not sure it will reduce the tax burden, but it will improve accountability, as local government entities would do the "ways and means," rather than some body of people 3,000 miles away.
Either that, or California should cede from the Union. That is one way to get out of a debt.