TREASURER Peter Costello has called on East Asia's central bankers to "telegraph" their intentions to diversify out of American investments and ensure an orderly adjustment.Thank you, George W. Bush -- the man who destroyed the American economy.
Central banks in China, Japan, Taiwan, South Korea and Hong Kong have channelled immense foreign reserves into American government bonds, helping to prop up the US dollar and hold down American interest rates.
Mr Costello said "the strategy had changed" and Chinese central bankers were now looking for alternative investments.
"Of course you can have an orderly adjustment," he told reporters. "And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it."
Mr Costello said the "re-emergence" of China as the world's greatest economy "is not something to be feared".
Friday, October 20, 2006
Apocalypse
This is the news. All else is superfluous. From the Sydney Morning Herald:
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10 comments:
Can't keep up. Between all the new stuff that comes out and the old stuff that I've been reading about, theres just too much to be pissed about. Was just reading up on the torture of John Walker Lindh over at Wiki. His charges were reduced from 10 to 2, 3 lifes sentences to 20 years in prison, in exhange that he be placed under a gag-order and not talk about what happened to him. Sure wish he'd speak up anyways.
It won't be the apocalypse. When the U.S. has to finance its own budget deficits, a few things will likely happen: 1) taxes will go up, 2) spending (including military spending) will drop, 3) U.S. adventurism abroad will be abruptly curtailed, 4) interest rates will rise 1 to 2 points and 4) the dollar will drop.
The sum effect is impossible to predict, but the adjustment won't be the end of the world. The standard of living for most Americans will undoubtedly drop, including for the most vulnerable, but there still might be positive consequences, if and when people begin demanding some measure of equity in earnings and taxes.
anonymous...
On the contrary, it WILL be the apocalypse, which is exactly why foreign central banks keep loaning us $72 billion per month. They know that if they don't, the US dollar collapses, and drags the whole global economy into chaos with it. The US budget deficit is now almost 7% of GDP. Making that up by raising taxes and/or cutting spending would plunge the US into a depression worse than the 30's. Have you ever run the numbers on 800 billion per year? That's nearly three thousand more in taxes per person per year, and even that wouldn't touch the eight trillion in current debt, on which the interest rate would go to the moon.
unirealist,
I don't know where your 800 billion figure comes from (or the 7% of GDP claim). Last time I checked, the deficit was $296 billion,or about 3% of GDP (unless you're including balance of trade deficits?).
And the U.S. doesn't finance 100% of the deficit from abroad. Foreign bankers own about half of U.S. debt issued to the public. The rest comes from U.S. sources.
As for taxes -- just raising them on the very rich could easily bring in 200 billion a year. Similarly, an end to military adventures could take off a few hundred billion more. Cut business subsidies and charge fairly for mineral rights, and we'd probably be close to $1 trillion a year in savings.
That aside, the U.S. public can finance its own deficits. The government will just have to pay higher interest rates to attract that investment, and at that point, foreign investors will also return.
I'm not saying catastrophe isn't possible. And, whatever happens, the standard of living of most Americans will drop. But keep the apocalypse out of it. People have been predicting doom next week for years. And the rest of the world has a vital interest in preventing a U.S. collapse.
Anon...
The $296 billion deficit figure that the government touts does not include off-budget items like the ongoing war, which in Iraq alone is costing us 9 billion a month. Nor does it include surpluses in the Social Security and Medicare funds, which are also being spent without accounting for them. Yes, the deficit is almost 800 billion a year; that's how much more the Fed gov't spends than it actually takes in as revenue. And if future obligations are taken into account (such as federal pensions and the new prescription drug benefit obligations), which is how Generally Accepted Accounting Practices would do the math, the true federal debt is about 50 TRILLION, with this last year's true deficit about 3 trillion.
No, the US doesn't finance all its debts overseas, but the "foreign purchases" figure for gov't debt is running now at 72 billion a month, as of last week.
I get my figures mostly from the financial advisors on kitco.com, which is generally recognized as a reliable site. You might try reading some of the commentaries there. I think you will be shocked to see how much the feds and their mouthpieces at the Wall Street Journal are massaging numbers to keep folks like you in the game. No meanness intended toward you, but for your family's sake I hope you look further into this.
unirealist,
The problem with this kind of accounting (per Kitco, if I understand you correctly) is, it calculates an infinite string of liabilities but not an infinite string of revenues. So these trillions in liabilities pile up with nothing on the other side of the ledger to offset them (i.e., population growth, increased wealth and income, etc.). It's not, in my view, a meaningful analysis.
Social security surpluses do indeed effectively reduce the deficit from its real value, but (again) these aren't "foreign" revenues, and we could recoup these costs by raising the $90000 cap on SS taxes.
The degree to which Iraq war costs are "off-budget" is indeed troubling. But these are not "permanent" expenses. At some point, there will be enormous political pressure to get out.
Don't get me wrong: U.S. finances are in potentially perilous condition. However, infinite liability figures don't tell you anything useful. These situations have a way of going on for a very long time.
Consider that 30-year government bonds are paying well under 5%. Do you really think bond investors, including the Japanese and the Chinese, are so stupid they would invest in a bankrupt concern, for a 5% return, or in order to sell shirts and DVD players at a Walmart in Peoria?
Usual and customary accounting procedures have never applied to governments, and for good reason: the cash flow model is completely different.
Anyway, that's my two cents. If it crashes next -- highly unlikely, but it could -- we'll find out first hand what an economic collapse of this order will look like.
The debate going on here is one going among academics and economists. On the one hand, you have people like Kotlikoff (Boston U.), who assert that the U.S. is effectively bankrupt and that markets are typically blind to such facts (including bond investors) until the crash occurs, and on the other, Paul Krugman, who counter that the analysis is focusing entirely liabilities.
Anyone interested can proceed to Kotlikoff's home page at Boston University, which links to a large number of his articles, and also Paul Krugman's 2005 New York Review of Books review of one of Kotlikoff's books.
As for Kitco -- their business is selling gold, and alarmist claims are the currency of bullion dealers. People who bought in 25 years+ ago, during another period of economic turmoil, lost a great deal of money.
Anyway, the old curse applies: may you live in interesting times. Fact is, people can't predict economic trends two weeks in advance, much less grand macroeconomic convulsions. Nobody knows.
sofla said...
The deficit is not really $296 billion dollars. That is the agreeable fiction that hides the true, much larger deficit.
First, this is the so-called 'unified budget' figure, an accounting fiction egregious enough that the Congress outlawed its use in the mid-'80s (although deficits continue to be reported using the method). That means there was approximately $150 billion in additional red ink that the cash flow surplus of Social Security covers. Still red ink in the general budget regardless, especially when SS will soon enough become another claim on general revenues rather than an income offset to other expenditures.
Then, you have all the 'emergency' expenditures, that don't count against the official budget figures. Normally, such weather and other related disaster spending may reach $25 to $40 billion a year. However, we are running two wars on an 'emergency' budget basis (illegitimate, since this is supposed to be for unforeseen and unpredictable spending), amounting to another $100 billion a year or so.
So, the NOMINAL deficit is more than doubled in reality, making that 3% of gdp deficit more like the 7% to 8% that the poster finds perplexing.
Yes, the real deficit is far higher than the official figure, and 7-8% of GDP is unsustainable. If we were Thailand or Argentina, our creditors would have already put us into bankruptcy, or enrolled us in one of the murderous IMF "adjustments", which pays off foreign banks while starving the local population (i.e., us).
However, the question here is of imminent collapse. The SS surplus/ripoff will persist for years, and the costs of the war in Iraq are likely to de-escalate very soon, as the public grow more and more fed up.
If and when foreign governments pull out of U.S. Treasury markets, interest rates will rise significantly, and the dollar will drop, thereby increasing inflation, but we're not talking about hyperinflationary levels. In turn, a recession is likely, which could actually bring rates down.
A more likely scenario than apocalypose is grinding, gradual decline of the U.S. standard of living. The Kotlikoff scenario is driven, at least in part, by ideological biases. This guy wants to institute a 33% national sales tax, in lieu of income tax, and he focuses almost entirely on dubious Social Security and Medicare projections far into the future, rather than BushCo's far more dangerous tax cuts and budgetary derelictions (right now).
That said, unirealist could be right. At any point, the market could be spooked, and pull out of U.S. bonds and equities, which would have potentially disastrous consequences.
However, IMHO, it's too easy to allow a sense of personal despair cultivate these doomsday scenarios. It can be hard to resist but is something to be avoided. Financial markets never operate as predicted, and the system as a whole is beyond understanding.
Thanks to everyone for genuinely reasoned responses.
Kitco does push precious metals, that's true. It also offers many other investment choices: foreign markets, Argentinian real estate, sectors that are a bit offbeat but potentially huge, currency markets, and commodities like wheat and soy.
It's also true that the dollar should have collapsed long ago, and may be sustained by more statistical legerdemain for another ten years. God knows I didn't think they'd be able to prop it up this long. It's a house of cards that has to grow to prevent implosion, and sooner or later reality will have its way.
I think sooner.
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