I don't know which is funnier, the ridiculous premise, or your contention that it is beign proved right.
Posted on 02/26/2006 3:43:27 PM PST by peyton randolph
-snip-
Dissenters say our prosperity is hollow. While the economy appears healthy, a disease is eating away inside, a disease that Dr. Greenspan has been treating with oxycontin. The chairman, they say, was a friend to presidents and kept them happy and himself in power by the greatest expansion of money and credit in history. And just as the easy-money Fed policies of the Hoover-Coolidge era led to the crash of ’29, a day of reckoning is ahead.
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(Excerpt) Read more at amconmag.com ...
To sum it up, they send us goods, we send them little pieces of paper.
Pat is right on target on many issues, but I think his understanding of economics leaves a lot to be desired. If this nation's debt load was anywhere near as worrisome as he makes it out to be, then we'd be seeing a dramatic rise in very specific interest rates (U.S. government securities, in particular) as a result of foreign investors assessing their U.S. bonds as far riskier investments than they are right now.
Ping.
I don't know which is funnier, the ridiculous premise, or your contention that it is beign proved right.
pat is further to the right them most of us. So far to the right he's come around to the left.
That could very well be true. I think his focus is on what he sees is the result of economic policies, policies perhaps better understood by others. But there could be other reasons why the interest rates have not jumped. Perhaps the creation of domestic money plus the exporting of money makes money abundant. There is no need to raise interest rates to attract money.
Bingo Age of Reason, and in incredible mind boggling volumes through, as I noted in earlier post, GSE packaged mortgages[referred to as "Fannie" or "Freddie"e or more generically "agencies"].
Pat believes that the way to improve the economy is by getting the government to protect domestic industries from foreign competition in which people would get high-paying jobs. The truth of the matter is, we are living in a time of economic change, and foreign trade creates wealth and with that, you get winners and losers. However, it's definitely good for the economy.
As noted, if they buy new debt, as is frequently the case, an external debt comes into existence. We don't owe it to ourselves. Also, some percentage of the average "CD player" "cash" is really credit card debt that builds over time ... or gets converted into mortgage debt through refi's.
"...All this says is that the U.S. is currently the best place to park one's money right now. The fact that we run a capital account surplus is an unambiguous market signal that our economy is vibrant and the best place to invest. Money flows to where it's treated best."
Interest rates are certainly higher in the U.S. than Japan. The Japanese have been fighting a price deflation [but not necessarily true monetary inflation] through what are essentially zero interest rates. The resulting "carry trade" is a lot of things, but healthy for the U.S. isn't one of them. Not unless you believe giving addicts increasing doses of opiates is treating the underlying condition.
"This flow is providing us with the capital to grow our $12 trillion economy at 4% a year."
If the money we are borrowing was flowing into capital investment or even into R&D I might agree with you, but housing is a consumer good not a productive asset. And then there's the before mention CD players and other gee gaws ...
"Central banks will manipulate their currencies to help their export driven economies. That's true. It still doesn't account for all the others who choose to buy our treasury debt and it most certainly doesn't offer any validity to the assertion that trade deficits cause debt. "
The "others" are to a large extent leveraged buyers many of whom are engaged [as per my last comment] in the carry trade and through that arbitrage are keeping U.S long term rates lower than they otherwise would be. Conundrum indeed.
"Government spending more than it takes in is what causes debt. Period."
Are you actually writing that the banking system does not create debt and thereby new money???
" Pat should know better. That he does this to rile those who don't know any better makes him, and his statement, ridiculous."
I think you are insulting those who disagree with your belief the party line on this subject. I recommend that you reconsider your position.
" Believe what you want but despite the increases in debt, both consumer and external, our household net worth has reached a record $51 trillion. Since Bush took office our external debt has grown by $2 trillion. However, our household net worth has increased by more than $10 trillion. Our net worth is increasing five times faster than our external debt and you think, because of this, the party's coming to an end and we're at risk of default?
The fact is public debt as a percentage of household wealth is shrinking. In addition, household credit is hardly a problem and public debt as a percentage of GDP is also decreasing."
That is the way leverage works. When asset prices, in this case housing prices are rising the difference between the purchase price and the debt incurred to acquire the asset can be exciting. If the asset price goes down, paper gains can evaporate and perhaps turn into paper or realized losses. In a lot of places, housing prices have become utterly disconnected from household incomes. When the a person with an above average income cannot afford a starter home ... calculating the net worth of home owners in that area is not going to result in a true measure of wealth.
Now consider credit card debt. In your opinion "not a problem"? If a lot of that debt had not been translated into mortgage debt via refis of various flavors that statistic would be even uglier.
"Inflation has averaged about 2% annually over the past 20 years and average Joe homeowner is doing better than ever.
Are you certain about your facts on inflation over the last 20 years? In any event, check out how inflation is being measured. Then ask yourself if you should really believe everything you are told. Then if that isn't enough, ask yourself if the average stockholder wasn't doing "better than ever" in 1929? If you think that is ancient history reflect on NASDAQ in the recent past or Houston in the 1980s or Southern California a little later. Of course we all know that sort of thing will never happen again.
"Even if inflation weren't tame, it's great for those who own tangible assets."
If inflation were the key to economic Nirvana, Argentina would not have declined from being one of the five wealthiest countries on a per capita basis in the world to their current status over the last 80 years. I do agree that some inflation is good for those with tangible assets, if the assets [leveraged or otherwise] inflate at the rate at least as high as the rate at which general purchasing power drops ... and if the market does not lock up ... and if you can afford to pay your taxes ... and if you don't need to buy replacements for what you sold ... and ...
However,even from a practical / realist's perspective; inflation is at its heart dishonest and dangerous. Remember that deflations arise from credit defaults and credit defaults can cascade into debacles. Sleep well Mase.
Age of Reason, I pinged you because I thought you might have something to add or correct.
Long term U.S. interest rates are being held down ["the conundrum"] by:
(i) The carry trade where yen are borrowed at a zero or near zero interest rate, sold for dollars which makes the dollar stronger, and the dollars used to bid on bonds which means more dollars chasing the supply of bonds meaning higher prices / lower interest rates. and
(ii) to a lesser extent an attempt by insurance companies and pension trust fund managers to match the value at maturity of their future liabilities with assets [bonds] of known future value.
Couple this with the very accurate perception that U.S. Treasuries and Agencies are seen as the most liquid financial instruments on earth -- denominated in U.S dollars the most liquid of currencies and you have the ingredients for very low perceived risk.
Perception is everything in financial markets until it isn't. Long Term Capital Management was the result of a couple of great applied mathematicians that made some bad judgments about how unlikely a set of circumstances actually were. The actual risk of the system coming off the tracks very soon may be much higher than is generally believed ... or conventional wisdom may have gotten this one right.
Absolutely -- great post.
Thanks for the ping.
Until China, for one, competes fairly, we should place a tarrif on their imports.
However I suppose we wouldn't dare--because as our creditor, China owns us.
China owns about $250 billion in US Treasury debt. How do you figure that they own us?
Not really my question, but I'll give it a try. They don't own us, but they own hold enough dollars and U.S. debt that if they wanted to hammer the dollar they could.
Would they? Probably not, as there is no obvious motive. OTOH, I am not privy to everything which they might believe to be in their best interests.
External debt comes into existence when the government spends more than it takes in and debt has to be issued to pay for it.
Also, some percentage of the average "CD player" "cash" is really credit card debt that builds over time
In what alternative universe?
"cash" is really credit card debt that builds over time ... or gets converted into mortgage debt through refi's
No, cash is just cash.
The resulting "carry trade" is a lot of things, but healthy for the U.S. isn't one of them.
And where in our economy does this unhealthiness manifest itself - other than in Pat Buchanan's nonsensical rants?
If the money we are borrowing was flowing into capital investment or even into R&D I might agree with you
The money we are borrowing is to pay for government overspending. Plenty of foreign investment is flowing into R&D and other capital investment. Were do you think all the capital is coming from to grow our economy at 4% a year?
but housing is a consumer good not a productive asset.
More than 2 million new jobs have been created in construction during the past decade. My house has doubled in value in less than three years. That all sounds pretty productive to me.
The "others" are to a large extent leveraged buyers many of whom are engaged [as per my last comment] in the carry trade and through that arbitrage are keeping U.S long term rates lower than they otherwise would be.
No. They're investors who like making a decent return on their investment with very low risk. Again, what else are they going to do with all their dollars? They can either buy goods from us or invest in our economy. They could stuff them in their mattress but that wouldn't make much sense, would it?
Are you actually writing that the banking system does not create debt and thereby new money???
No. External debt is created by government having to borrow because they spend more than they take in. It's really very easy to understand.
I think you are insulting those who disagree with your belief the party line on this subject. I recommend that you reconsider your position.
It has nothing to do with the "party line" although the third party contingent on FR would like to believe that this is the case whenever someone disagrees with their doom 'n gloom. I'm also not interested in insulting them but facts are facts. As for reconsidering these facts, I recommend you learn more about the subject here.
When asset prices, in this case housing prices are rising the difference between the purchase price and the debt incurred to acquire the asset can be exciting.
Don't you mean the difference between the market price and the debt incurred? If so, it may be exciting to many but it still only accounts for 21% of our household net worth.
If the asset price goes down, paper gains can evaporate and perhaps turn into paper or realized losses.
Yes, pretty basic. This may apply to some regional markets that are overvalued but this country has not experienced a year over year decline in the aggregate value of real estate since before WWII.
In a lot of places, housing prices have become utterly disconnected from household incomes.
Yes, I see where, based on this assumption, Naples, Florida is the most likely community to experience a dramatic correction in property values. This kind of evaluation neglects to take into account the large number of wealthy people who can live there regardless of what the local wages or incomes may be. Rich Americans and foreigners are driving the market upwards and are not limited by income.
When the a person with an above average income cannot afford a starter home ... calculating the net worth of home owners in that area is not going to result in a true measure of wealth.
So someone in Orange County with a $60,000 income (above average) can't afford a $600,000 home. So what? This has no impact on their net worth or their wealth, however you choose to define it. People can accumulate wealth without ever owning a home. We can measure wealth in all sorts of ways: health, happiness, love or net worth. For our discussion though, wealth is being considered in terms of net worth.
Now consider credit card debt. In your opinion "not a problem"?
That's right. We spend more now because we earn more and tend to borrow more when interest rates are low. Our debt to asset ratio was much lower when Jimmy Carter gave us 18% interest rates.
If a lot of that debt had not been translated into mortgage debt via refis of various flavors that statistic would be even uglier.
What statistic would be uglier? Our debt to asset ratio is only 18.3%. The average American homeowner has 57% equity in their home. Not exactly the doom you would have us believe now, is it?
In any event, check out how inflation is being measured. Then ask yourself if you should really believe everything you are told.
It's interesting that one of the top conservative economists in the country asked the same question but came to a different conclusion:
Then if that isn't enough, ask yourself if the average stockholder wasn't doing "better than ever" in 1929? If you think that is ancient history reflect on NASDAQ in the recent past or Houston in the 1980s or Southern California a little later. Of course we all know that sort of thing will never happen again.
You're comparing today to 1929??? Now you've jumped the shark into the tin foil universe. You must be expecting some pretty serious doom. What's going to drive this; 10% unemployment? 20% interest rates? Out of control inflation? Here's another good article that addresses the same gloom you refer to.
If inflation were the key to economic Nirvana
The key to a strong economy is innovation, capital formation and entrepreneurial ability. Today, we are the only country in the world that has all three in abundant supply. This is why our economy remains the envy of the world.
It's capital formation that got this whole debate going. You guys are as wrong as can be to think that a current account deficit somehow creates debt. It just doesn't work that way even though demagogues like Buchanan want you to believe it is so. But don't take my word for it.
Stop Worrying About the Trade Deficit
Political Boundaries are not Economic Boundaries
Walter Williams: The Trade Deficit is Nothing to Worry About
Maybe all this good news will help you sleep better at night.
You overestimate the amount of damage they could do. Compared to the volume of currency trades every day, $250 billion isn't all that much. If they dump their treasuries it will cause an upward blip in interest rates. Other buyers will step in, rates will decline.
If they then try to sell the dollars, it will cause their currency peg to slip. Makes their goods more expensive. Hurts their economic growth.
So sure, they can injure us, a little, and injure themselves much more.
So, how is hurting us a little the same as owning us?
I'll save you some time, it's not.
So you believe that existing debt purchased by foreign entities is not "external" debt. That might be an "interesting" definition but not a particularly useful one. Selling a debt instrument representing a stream of future interest payments and then repayment of principle is not a recipe for wealth.
"In what alternative universe?" [In reference to credit card debit incurred to buy a CD player.]
Play nice. As I just commented, most transactions at a Best Buy or whatever are made with plastic. A sizable percentage of the American public is spending more that it is making. With only occasion blips consumer debts and mortgage refi cash outs executed to pay for current consumption are building. What part of that concept is a mystery to you?
" No, cash is just cash."
Yup. That is why I placed "cash" in quotes in my comment in response to your comment where wrote about paying "cash" for the before mentioned CD player. Cash is cash and most CD players are bought with plastic.
"And where in our economy does this unhealthiness manifest itself - other than in Pat Buchanan's nonsensical rants?" [in reference to the ill effects of the carry trade.]
In false interest rate signals [think current mortgage rates in light of huge loan demand] and a strong dollar further aggravating the trade deficit. The average Joe homeowner you seem to believe is doing so well is actually losing purchasing power on his income. He has a house that has appreciated, but if he sells it he still has to live somewhere. He can cash out refi, but now he is carrying more debt on an asset that can go down in price. Note that this is not a knock against Bush. It has been going on since the 1980s.
"The money we are borrowing is to pay for government overspending. Plenty of foreign investment is flowing into R&D and other capital investment. Were do you think all the capital is coming from to grow our economy at 4% a year?"
Correct as to Government spending. I believe that if you check, you will find that total debt is growing faster in absolute dollar terms than the four percent of growth that you refer to. And plenty of our increasing debts relate to housing and other consumer goods. We buy their stuff. They buy our debt We buy some more stuff. They buy some more of our debt. Doesn't that strike you as a wee bit unhealthy over the long haul?
"More than 2 million new jobs have been created in construction during the past decade. My house has doubled in value in less than three years. That all sounds pretty productive to me."
Construction is notoriously cyclical. My father and now my brother have been in the masonry contracting business for the last 60 years. They have done OK, but have seen the booms and the busts.
If you sell now, you will do nicely on your house. Congratulations. However, you will still need to live somewhere and that somewhere has probably also appreciated.
As far as whether housing appreciation is "productive" my analysis is "no". It is the same house. It serves precisely the same function that it did three years ago. Is it worth twice as much now? "Yes" based on market conditions. Over the long term some real estate will appreciate nicely, but doubling over three years is not sustainable. Remember that real estate in Japan after an incredible run declined for something like fourteen consecutive years.
"No. They're investors who like making a decent return on their investment with very low risk. Again, what else are they going to do with all their dollars? They can either buy goods from us or invest in our economy. They could stuff them in their mattress but that wouldn't make much sense, would it?" [Again in referenced to the carry trade.]
Direct foreign investment is clearly investing in our economy. Buying our debt is as you stated an alternative to holding our cash. Saving and investing are not synonymous However, the use for which the money is being borrowed [production or in the case of the U.S. in 2006 primarily into consumption] is also critical in determining whether wealth is being creating domestically of transferring to foreign lands.
"Yes, I see where, based on this assumption, Naples, Florida is the most likely community to experience a dramatic correction in property values. This kind of evaluation neglects to take into account the large number of wealthy people who can live there regardless of what the local wages or incomes may be. Rich Americans and foreigners are driving the market upwards and are not limited by income."
I haven't been to Naples. Maybe there is something magical about the place. Location is important over the long haul in real estate. OTOH, I don't see Naples as existing in different world. A lot of butt ugly Florida real estate has seen some spectacular price appreciation over the last few years. Times have changed, but you might want to research the Florida land boom of the early 1920s and look for parallels. Read some stories about how the Miami condo market is shaping up. Examine the appreciation of in condos in Naples. Houses in the right locations? Maybe. Watch out for condos at the tail end of hot real estate markets.
"So someone in Orange County with a $60,000 income (above average) can't afford a $600,000 home. So what? This has no impact on their net worth or their wealth, however you choose to define it. People can accumulate wealth without ever owning a home. We can measure wealth in all sorts of ways: health, happiness, love or net worth. For our discussion though, wealth is being considered in terms of net worth."
What it does mean is that the $600,000 price tag on the house is not supported by fundamentals -- there isn't enough income for the average citizen to service the debt required to buy that house by a wide margin. BTW, if the equivalent rental value is dramatically lower than the cost of ownership you have another tip off that speculation is the driver.
"No. External debt is created by government having to borrow because they spend more than they take in. It's really very easy to understand."
You provided this response in a reply to my question addressing whether you understood the role of the banking system in the creation of money through debt. Apparently you don't understand ... and "yes' external debt can come into existence by the sale of internally held debt to foreign buyers. Foreigners are buying Treasuries, Agencies, and Corporates -- all sorts of debt. We either individually as taxpayers or through our mortgages; or through our stock ownership interests will need to service those debts.
"It has nothing to do with the "party line" although the third party contingent on FR would like to believe that this is the case whenever someone disagrees with their doom 'n gloom. I'm also not interested in insulting them but facts are facts. As for reconsidering these facts, I recommend you learn more about the subject here."
From your source [I no issues with the quoted portion of the linked statement]: "Theoretically, the BOP should be zero. Thus, the current account on one side and the capital and financial account on the other should balance each other out. When an economy, however, has positive capital and financial accounts (a net financial inflow), the country's debits are more than its credits (due to an increase in liabilities to other economies or a reduction of claims in other countries). This is usually in parallel with a current account deficit; an inflow of money means that the return on an investment is a debit on the current account. Thus, the economy is using world savings to meet its local investment and consumption demands. It is a net debtor to the rest of the world. [emphasis added]
The last two sentences make my point. The U.S.is indeed borrowing from the rest of the world to finance investment and current consumption and thereby becoming increasingly indebted. The problem is that it all consumption. You seem to believe that only the Government can spend more than it takes in or that it has some sort of a monopoly on foolish expenditures. My assessment is that the U.S. consumer is spending like a the proverbial drunken sailor and is rapidly approaching the point where he will be unable to service his debts which emphatically include mortgages as well as student loans, auto loans, and credit cards. I am an optimist in that I believe that there is still time to pull back on the throttle and muddle through. Unfortunately, that would require some strait talk and careful consideration. We may not have it in us. Time will tell.
"You're comparing today to 1929??? Now you've jumped the shark into the tin foil universe. You must be expecting some pretty serious doom. What's going to drive this; 10% unemployment? 20% interest rates? Out of control inflation? [continues]"
Things move in cycles. The last of those who lived through the great depression as adults are in their late 80s and for the most part even their children are past their forties. Memories have faded. There are some similarities. The punch line is that "yes" things can get bad again.
"No" I don't think that Brenake can restore prosperity by dropping paper money out of helicopters [if you do, then refer to your own comments regarding tin foil and shark jumping.] The precipitating event. Maybe we won't have one. Maybe we will muddle through. OTOH, if I were to pick the number one candidate for a melt down, it would involve an accident with Fannie and Freddie as a consequence of a relatively moderate decline in housing prices nation wide. The equity on those monstrosities is extremely thin and their accounting has been suspect even in the good times.
Once again, sleep well Mase, and remember when offered that its not really cool aid.
Age of Reason "Ping"
And I didn't write that it was. Also, for what it is worth, most of the FOREX volumes are really exotic derivative really exchanges not out and sells or purchases of money.
Do you recall how much real money George Soros had at his disposal when he wacked the British Pound [not a rhetorical question, but I don't believe that it was all that much]?
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