DEBT CRISIS of "rich" COUNTRIES

[bhavin]

All the Rich countries are in DEBT > severe debts, but what i am failing to understand is for these countries to spend, they have to borrow, but as all rich countries are in DEBT, then from where are they borrowing??????

From poor??? They have no money!

So from where is the debt coming from???

HELP!!!!

 

[DionysusToast]

My understanding is that they borrow from central banks, who then charge interest on the loan. The loan and interest is paid back to the central banks from taxpayer money.

Central banks issue bonds, which sometimes people buy and sometimes they just print money to buy the bonds quietly back themselves, a few days after the issue.

 

[nine]

When you buy goods from China they give you credit (buy bonds).

Similarly oil from Saudi Arabia.

If you wake up and realize you should stop buying all that crap then who suffers? If someone defaults, do you think that it is just the debtor who suffers.

 

[gc1]

In the case of the U.S. foreign holders of U.S national debt is about a third http://www.treasurydirect.gov/NP/BPDLogin?application=np

Slightly older figures on http://www.economicshelp.org/blog/economics/who-owns-government-debt/

For the total U.K foreign holders of gilts is available on the DMO site, also about a third http://www.dmo.gov.uk/rpt_parameters.aspx?rptCode=D5N&page=Gilts/Overseas_Holdings

So in both cases about 2/3'rd of national debt is owed to citizens and institutions within the country itself. E.g. to older individuals who are savers and to pension funds and mutual funds etc.

 

[Marwan2010]

The other day US implied to China and Arabs that it is in "their" own interest to ensure that the dollar does not collapse, if it does then who suffers most??

Off cource the chinese and arabs , as they have virtually all their wealth invested in dollars

 

[Marwan2010]

well the "rich" countries continue to "screw" the poor countries: Ok consider the following scenario > a true case:

Dollar is collapsing, and at the lows > and analyst are calling for a bloodbath
Euro is going up up and up and at all time highs, and analyst are calling for a mega bull run to continue

The poor countries by this time have all their foreign currency reserves in dollars > just like a amateur trader, they panic and offload their dollar position and buy the Euro

a year later the dollar has had a great bull run.............
the Euro has collapsed!

tell me who benefits out of this?

the americans? the europeans? or the poor country who has worked damn hard to "save"

 

[Marwan2010]

 

[bhavin]

When you buy goods from China they give you credit (buy bonds).
Similarly oil from Saudi Arabia. If you wake up and realize you should stop buying all that crap then who suffers? If someone defaults, do you think that it is just the debtor who suffers.

Good point, but what is amazing is why on earth the arabs / chinese are giving money to the europeans / americans for "safe keeping"

especially when the dollar is not even worth the loo roll. will greatly appreciate some contribution, so that i can understand it better

 

[bhavin]

My understanding is that they borrow from central banks, who then charge interest on the loan. The loan and interest is paid back to the central banks from taxpayer money.

Central banks issue bonds, which sometimes people buy and sometimes they just print money to buy the bonds quietly back themselves, a few days after the issue.

its getting confusing.........

they borrow from central banks.... But the govt owns most of the banks, and bailed them out!

So where did this money come from, especially when they do not earn enough?

HELP!

 

[Martinghoul]

Central Banks don't issue bonds... Countries borrow in the capital mkts from their own citizens and external investors, not from the Central Banks. The money comes from people and organizations who are willing to lend to the government, as easy as that.

 

[bhavin]

Central Banks don't issue bonds... Countries borrow in the capital mkts from their own citizens and external investors, not from the Central Banks. The money comes from people and organizations who are willing to lend to the government, as easy as that.

Ok, So basically say UK has a Trillion Dollar debt! - basically the citizens have given that to the government . Yes? So really in effect overall the wealth of th enation remains the same? > so i fail to understand, why are people talking of depression?

 

[Martinghoul]

Ok, So basically say UK has a Trillion Dollar debt! - basically the citizens have given that to the government . Yes? So really in effect overall the wealth of th enation remains the same? > so i fail to understand, why are people talking of depression?

Well, suppose this money that the citizens have given to the government has been spent, and spent unwisely? Suppose it was invested into building a whole lot of widget-producing factories and there's no longer a market for widgets. Does the wealth of the nation remain the same?

Generally, there's no reason to think of government debt as different to private debt. What happens when a company or a person borrows to invest in a non-productive project?

Generally, people talk about depression not because of the economics of the system, per se. For better or worse, an economy is a complex machine, affected by sentiment (some economists call this the "animal spirits"). If things get to the point where these "animal spirits" die, you get into a depression. Some say it's what happened in the Great Depression and also in Japan.

 

[DionysusToast]

its getting confusing.........

they borrow from central banks.... But the govt owns most of the banks, and bailed them out!

So where did this money come from, especially when they do not earn enough?

HELP!

The government doesn't own the central banks. The central banks (in the US, anyway) have the right to print money and then loan it to the govt.

 

[Martinghoul]

The government doesn't own the central banks. The central banks (in the US, anyway) have the right to print money and then loan it to the govt.

With all due respect, you're completely wrong, DT... Under normal conditions (no QE), central banks do NOT loan money to the govt. That would be a very bad thing, indeed, if it were the normal MO of an economy.

 

[DionysusToast]

OK - then let's be a tad more detailed.

The US govt creates securities which Federal Reserve buys quite a lot of. These bonds pay interest which the Federal Reserve earns. These interest payments come from taxpayer money.

Sounds pretty much like a loan to me.

 

[Martinghoul]

OK - then let's be a tad more detailed.

The US govt creates securities which Federal Reserve buys quite a lot of. These bonds pay interest which the Federal Reserve earns. These interest payments come from taxpayer money.

Sounds pretty much like a loan to me.

Yet again, let me remind you that the buying of US treasury securities by the Federal Reserve (and the BoE, for that matter) is a special, one-off program that was explicitly authorized by the FOMC (and the MPC). This explicit monetization of govt debt is NOT normal and only happens under extreme conditions.

So I urge you not to imply that the QE phenomenon is somehow a normal part of the US (or UK) economy. Moreover, the Fed has bought exactly $300bn treasuries, while $2.1trn was issued in 2009. So you're calling a one-off purchase (the program has since stopped) of roughly 14% of the total issuance "quite a lot". It isn't really, in the grand scheme of things.

 

[DionysusToast]

Fair enough - I agree that these are interesting times and I would say that your level of knowledge is way above mine on this.

Does the $300 Bn in treasuries include only direct buys at the initial auction or does it include those that the FED buys back off the Chinese 3 days after the original auction ? Serious question.

 

[Martinghoul]

Fair enough - I agree that these are interesting times and I would say that your level of knowledge is way above mine on this.

Does the $300 Bn in treasuries include only direct buys at the initial auction or does it include those that the FED buys back off the Chinese 3 days after the original auction ? Serious question.

Sure, we're having a polite discussion and I appreciate that...

$300bn includes the purchases made by the Fed in the open mkt as part of the FOMC-authorized QE facilities. I should mention that they're also buying $1.25trn of Agency MBS and $200bn of Agency debt.

I am not aware of the Fed buying either directly at auction or off the Chinese 3 days after the auction. For the record, I don't believe the various conspiracy theories that are out there about the US govt's secret purchases of various assets (PPT buying stocks, Fed buying treasuries, etc).

 

[Benton D Struckcheon]

It kind of all depends on what is considered sound practice. Back in the days of the classic gold standard, only central banks that were a bit off the beaten track held more interest bearing securities from other countries than they did gold or silver. Today, it's considered normal practice for central banks to hold interest bearing securities, and holding gold is considered OK for diversification, but you really don't want to hold too much, because it doesn't earn any interest.
So, in a world of floating currencies, it doesn't take much brainpower to figure out that if you buy enough of some other country's debt, you can run that country's currency up and yours down relative to each other, and goose your exports to that country. China, Japan, and even India all do this relative to the dollar. One would think that the 20 year stagnation of Japan would show that this policy is not some sort of economic Holy Grail, but I suppose the lesson is a hard one to learn.
This kind of currency war, because that's what it is, was foreseen by Paul Einzig all the way back in 1972 when he wrote "The Destiny of the Dollar" very shortly after Nixon took the dollar off the remaining fig leaf of a gold standard that was still around at that time.
So today we have all these crazy imbalances, and even after a big fat crisis, the situation still isn't being addressed. One wonders what it will take.

 

[Marwan2010]

Benton > nicely explained, you "one wonders what it will take" > me thinks that without a doubt, depression is on cards, the question is for how long can this be avoided!