The world economy as US Ponzi scheme

[peterpr]

World economy = US Ponzi scheme

Provocative thread title? Yes, but it's straight out of the Asia Times.

What you and I think doesn't matter much in the great scheme of things. And trading success has little to do with forecasting seizmic shifts in the global economy either. But, as a backdrop to trading, I reckon it pays to keep your ear to the ground.

So, consider this: With the the size of the US trade deficit; It's ongoing export of manufacturing capacity to Asia; It's reliance on the continued 'recycling' of Asian Dollar earnings into its Bond market to fund its budget deficit + a host of other unstable US internal bubbles and imbalances, it probably matters a great deal what the movers and shakers in the creditor Asian countries are thinking about it all right now.

The following articles in The Asia Times provides a disturbing insight into their thinking:

http://www.atimes.com/atimes/Global_Economy/GA06Dj01.html

The whispers are getting louder and they are telling of stormy times ahead. Bin-Laden said his aim was to Bankrupt the US. Such an enterprise is clearly less far-fetched than it sounds.

 

[peterpr]

Here's another one - this time from the Korea Times.

http://times.hankooki.com/lpage/opinion/200503/kt2005031318135054240.htm

 

[Blether]

Leaving aside for now the bearded fella's grab for the credit: when do you expect the whole house of cards to come down ?

 

[trendie]

re:
"Bin-Laden said his aim was to Bankrupt the US. Such an enterprise is clearly less far-fetched than it sounds"

Bin-Laden has been beaten to it by a certain George Walker Bush.

 

[peterpr]

Leaving aside for now the bearded fella's grab for the credit: when do you expect the whole house of cards to come down ?

I'm no expert. But I do know that the whole thing is held together by a coincidence of interest between the US (it's military might + inability to save, need to consume etc) and Asian developing economies (Need to develop industrial/productive base whilst exporting production to West by keeping their currencies pegged to the Dollar). It can go for as long as they + Japan are happy to see the value of their reserves (mainly dollar denominated bonds) loose real value. They know that if they do signal any such move (eg like exchanging their dollars for Euros or gold or a basket of Asian currencies) or simply change policy too suddenly, they will collapes the dollar which will have catastorphic effects on their own economies too.

So in the meantime everyone praises the fineness of the Emporers cloths in public whilst in private they know he's bollock naked.

 

[peterpr]

Interesting article in NY Times entitled "Our currency - Your problem" on thread subject at:

http://www.nytimes.com/2005/03/13/magazine/13WWLN.html

(You'll have to register to read the whole thing)

<Snip>

Perhaps the most amazing economic fact of our time is that between 70 and 80 percent of the American economy's vast and continuing borrowing requirement is being met by foreign (mainly Asian) central banks.

Let's translate that into political terms. In effect, the Bush administration's combination of tax cuts for the Republican "base" and a Global War on Terror is being financed with a multibillion
dollar overdraft facility at the People's Bank of China.

 

[Blether]

Nor am I

It's surely not in the interests of any of the Euro, Asian, or US zones for any one of these to undergo economic crisis.

I only got through about a fifth of the Asia Times article, which reads to me as needlessly overwrought, and short on serious scholarship:

>> How much of our dollar stake we have lost depends on how much we originally paid for it.<<

Well, well: (we) invested in something and made a loss. Someone else's responsibility ?

>>Uncle Sam let his dollar fall, or rather through his deliberate political economic policies drove it down<<

Or we all in concert let it fall, by *not* throwing good money after bad ? These Machiavellian policies remain unstated so far.

>>foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake<<

If my currency's pegged to the USD, how am I losing my dollar stake ? Only when I buy from / invest in the non-dollar-linked regions with my devalued dollars, which isn't what our man has written here.

>>Uncle Sam's debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable<<

A third ? Ooooooo. Nearly as bad as a second-year Uni student. I guess 25-year mortgages are out in Andre-Gunder-Frank-land.

>>Uncle Sam's domestic, eg credit-card, debt is almost 100% of gross domestic product (GDP) and consumption, including that from China.<<

Including... GDP from China ? Consumption from China ? Credit-card debt from China ? All the tea in China ? Just what is the intention of this sentence ?

- etc. Yes, easy pickings, but what of the core message ? Is the fact of paper money to be America's fault ? Or the nature of a service-heavy economy where so much activity is divorced from the reality of food, clothing and shelter ? I'm afraid I don't find this kind of hysterical US-bashing attractive.

Yes, the world (Europe as well as Asia including Japan) has control over the US's debts to it. Should we blame America if we all continue to lend her money, and she continues to borrow it to a level of which we disapprove ?

>>as long as they + Japan are happy to see the value of their reserves (mainly dollar denominated bonds) loose real value.<<

The nature of foreign currency reserves being that they are foreign currency, yes they are exposed to exchange risk. But clever old Japan has effectively pegged its currency, too, to the dollar, so it's mostly just European goods that are expensive for her. Japan's major foreign concern is oil (remember the Pacific war ?), which is priced in...USD.

The majority of Japan's personal wealth (the real issue) is in JPY - JPY1500 trillion, is it ? Yet where the Japanese could all give up going to the company, give up constant currency intervention to support the dollar, let the yen rise naturally to the 70-to-the-dollar level and above, buy up the rest of the world's businesses and leave us all to make our own cars and music players, they continue to play a steady role in the international economy.

>>They know that if they do... they will collapse the dollar<<

And isn't the fact that they know it a comfort ?

 

[chump]

LOL...this is the 'tiger by the tail"...story....Japan and China can't afford to let go ,but can't hold on forever either...be lovely to see exactly what's going on below the reserve counter and how it matches up to what is being publicly stated..while the euro zone is the current whipping boy failing to stimulate demand history might yet say these countries got their timing right holding back those policies for when they were really needed...I'd love to see the Euro countries cosying up to Russia rather than fighting with them over every issue..what a resources boost that could bring
the interesting question might be just how high US interest rates eventually go to attract investment and to what extent that might drag our domestic interest rates along in competition for those same investments...interesting times to come and I personally still like the thought that 'cash is king'

 

[ZiggieCME]

Ater reading that Asian Times article, I have the impression that someone over there got burned by exchange rate volatility. Well, anytime you play the game of going outside your own currency, you run the risk of getting burned.

Many other things in that article are rather bold yet inaccurate statements.

91 Billion dollars. That was the number this morning out of the treasury. Doesn't sound to me like diversification out of the dollar.

Z

 

[peterpr]

I agree, it's easy to pick holes in the Asia Times article (less so the Korea + NY Times ones ).

Also, much of what appears in all of them has been common currency (no pun intended) in the non-mainstream financial media for 12 months or more now but it's hardly a LOL'ing matter - trends don't go on for ever and the question is just how long can this one (exponentially increasing US + other Western deficits) go on + what it will take to reverse them. I reckon a bit of time spent pondering that question could turn out to quite profitable myself.

The real point being made when I strted the thread is that the core of this stuff is now finding a wider audience not only in mainstream Western commentary but, more ominously, in the mainstream commentary of the creditor nations as well. I have no idea how things will resolve, but I DO know that US deficits cannot go on increasing at what amounts to almost exponential rate (watch for the 2004 4th Qtr Current account figures at 8:30 EST today - concensus $184 Billion - thats $736 B annualized and @$620B actual for the year) Dubya's forecasts for 2004 at the start of his first term was for a surplus ! - so much for government forecasts!

And there aint no safe haven in the Euro either - sluggish economies getting worse as the Dollar weakens + abandonment of the early deficit disciplines etc etc.

 

[TWI]

Probably ends up coming back to commodity crrencies in this case such as AUD and CAD or simply long commodities. Gold is the classic example but I think a basket of commodities is the best bet right now.

http://www.rogersrawmaterials.com/page1.html

Dollar catching Asian flu
By Alan Boyd
The Asia Times - Hong Kong
SYDNEY - They may be telling a different story to money markets, but Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years, confirm global banking data.
http://atimes01.atimes.com/atimes/Asian_Economy/GC11Dk01.html

 

[Blether]

Certainly there's been a long downward path in the economic cycle as we pay for "irrational exuberance" and the dot-com bubble, but I wouldn't worry about President Cheney letting Dubya get in the way of too much of the decision-making. As he said himself in debate last year 'duh - it's *hard*'.

Inheriting an economy at the top of a long slope, the administration has embarked on a classic Keynesian spending program, replacing private demand with public demand to soften the landing. On the political front, one way and another they've created enough flag-waving frenzy to achieve re-election with an "increased majority". Like the blind whatsitsname, you have to hand it to them.

As for the mainstream media, in the first place I'm sorry but I'd question the logic that the English-language Asian press is anything like mainstream. Are you following the mainstream Asian media in native languages, or reading a lot of translated articles ? You don't mention them. Or are you referring to mainstream Asian media as quoted in the NY Times or elsewhere ? Korea is hardly a major creditor nation in the context in which you use ithe phrase.

In the second place, mainstream media anywhere... $736B is a lot of money to me, personally, but how does it compare on a GDP-normalised basis to the current account deficits of other nations in similar circumstances at different times ? These guys make their money selling fear, don't they ? If and when there's a big crash, we'll hear 'we told you so' all right, and some will forget they're *always* telling us so.

>>I have no idea how things will resolve, but I DO know that US deficits cannot go on increasing at what amounts to almost exponential rate<<

I agree with your forecast that US deficits will not continue to increase at an exponential or almost-exponential rate.

Do you want to talk about where you see profits in this speculation on fundamentals ?

 

[peterpr]

.
As for the mainstream media, in the first place I'm sorry but I'd question the logic that the English-language Asian press is anything like mainstream. Are you following the mainstream Asian media in native languages, or reading a lot of translated articles ? You don't mention them. Or are you referring to mainstream Asian media as quoted in the NY Times or elsewhere ? Korea is hardly a major creditor nation in the context in which you use ithe phrase.

Valid point - and they're Murdoch-owned titles too! But both are published in native language -and available as such on the web. My guess is that the movers and shakers certainly do monitor their content closely

In the second place, mainstream media anywhere... $736B is a lot of money to me, personally, but how does it compare on a GDP-normalised basis to the current account deficits of other nations in similar circumstances at different times ?

It's about 6.5% of US GDP. UK deficit is currently about 2.9% of GDP. EU rules used to impose strict sanctions for 3%+ - now relaxed - at the behest of Germany no less! IMF get nervous above 3% and send in the cavalry at 4%. BUT US is exempt - it controls the worlds reserve currency and, to the extent that it does not control the IMF, doesn't give a stuff what it says. Put another way, the US deficit is fully 35% of the UK's total GDP and the UK is the 4th lagest economy in the world (for the time being).

Sure the US will do all it can to manage the present situation to it's advantage - and it's been pretty good at doing so historically but the present combination of deficits and asset bubbles really is unprecedented.

Do you want to talk about where you see profits in this speculation on fundamentals ?

Good point. That's the nub of the matter.
For short-term trading activity - I guess it makes little if any difference - just watch the price action like a hawk and act accordingly as usual. For longer term stuff though, it 's a sobering backdrop that should prompt careful analysis of just where real currency/inflation proof value really lies

 

[Pat494]

Worried

Not bl**dy likely.

The world's strongest nation

The creator and donor to the history of human culture - Mickey Mouse

They haven't even called up Batman yet

 

[Blether]

EU rules used to impose strict sanctions for 3%+ - now relaxed - at the behest of Germany no less! IMF get nervous above 3% and send in the cavalry at 4%. BUT US is exempt - it controls the worlds reserve currency and, to the extent that it does not control the IMF, doesn't give a stuff what it says.

Thanks for that, Peterpr, that does shed some light. I'm inspired to search out figures from the Reagan era, and after the '73 oil shock, amongst others, but short of time. I did find this, written in 1992 and reviewing the weak-dollar-and-high-deficit Reagan years - to quote a passage I particularly liked:

>>
This brings us the proposition that a current-account deficit, or the trade component thereof, is not necessarily a sign of a nation's weakness. Indeed, during the hundred-year dominance of Britain from Waterloo (1815) to World War I (1914), Britain had a chronic trade deficit despite the captive markets in the Empire for British exports. This was because money poured into the country on both the capital account (countries held sterling bonds; foreigners invested in the UK), and the current account (foreigners purchased British services, such as insurance from Lloyd's banking from the City of London, engineering from the Midlands). This incoming money was used by the British to buy goods from everywhere, creating the highest standard of living in the world. Imports were good for Britain, not only because consumers benefited, but because the foreign products often forced British products to be competitive. Only as Britain became more protectionist, toward the turn of the century, did she become less competitive.
<<

Full article - http://www.nationalreview.com/reagan/galbraith200406101423.asp

I agree that the asset bubble is cause for concern, and frequently come back to this page - http://www.gold-eagle.com/editorials_02/jmiller092402.html as well as bearing in mind the words of historian John Brooks' about the 1929-33 experience:

"It came with a kind of surrealistic slowness…so gradually that, on the one hand, it was possible to live though a good part of it without realizing that it was happening, and, on the other hand, it was possible to believe one had experienced and survived it when in fact it had no more than just begun."

Full article again, and this further addresses the core of the issue under discussion - http://www.depression2.tv/chronicles/prechter-1.html

You are quite right that it doesn't do to sit at your trading screen wearing blinkers.

 

[peterpr]

Thanks for that, Peterpr, that does shed some light. I'm inspired to search out figures from the Reagan era, and after the '73 oil shock, amongst others, but short of time. I did find this, written in 1992 and reviewing the weak-dollar-and-high-deficit Reagan years - to quote a passage I particularly liked:
<snip>

Thanks for the links. Prechter has quite a following in the US - a cult figure you might say - a DOW theory Guru too. Always worth listening to IMHO

The piece about the British Empire struck chords. I've read similar stuff elsewhere recently. It likened the present US situation to the UK at the height/mid-decline of empire when the colonies effectively paid tribute to the centre in the form of gross trade imbalances not unlike with the developed /u-developed world today - with the US at the pinnacle. That was a time when Sterling was the world's reserve currency, much as the Dollar is today. It was WW1 that started the decline and WW11 that effectively scuppered British hegemony. Interesting parallels with US dominant position and biggest debtor nation in history today

 

[Blether]

OK. Thanks for Dow theory, which is proving an interesting read.

After further investigation I've not much else to add, except to comment that digging into the TIC data, I'm interested to see the UK alone bought the same amount of US long-term debt as Japan in 2004, and intrigued that as of December, of USD2.9 trillion US debt to 'foreigners' (excluding long-term securities) outstanding, USD1.2 trillion is due to Carribean banking centres.

Oh, and one other thing is this quote from January this year:

>>
As today's WSJ points out, in the glory days (1978), the US current account deficit was only 1% of GDP (6% now) and net foreign assets were plus 7% of GDP versus -25% today. So, everything must have been groovy in 1978 and a downer now. I don't think so.

Name a modern economy you admire that has "trade surplused" its way to the big leagues. Japan is the only example, and it is not a shiny one. As Sharon Stone answered critics who said she slept her way to the top, "You can only f*** your way to the middle."
<<

( http://www.roubiniglobal.com/setser/archives/2005/01/the_novermber_t.html )

Now, that's a laughing matter.

Cheers.

 

[peterpr]

>>
As today's WSJ points out, in the glory days (1978), the US current account deficit was only 1% of GDP (6% now) and net foreign assets were plus 7% of GDP versus -25% today. So, everything must have been groovy in 1978 and a downer now. I don't think so.

Name a modern economy you admire that has "trade surplused" its way to the big leagues. Japan is the only example, and it is not a shiny one. As Sharon Stone answered critics who said she slept her way to the top, "You can only f*** your way to the middle."
<<
.

She's from Brown's University - Ivy League and all - the one who wrote that

I reckon your on a sound track reading Brad Setser and Nouriel Roubini. Roubini is a real heavyweight - but non-establishment figure. He's regularly quoted in the mainstream US financial press when they want to ruffle a few feathers and be controverial. I really rate the guy and he takes all this deficit/bubbles/world imbalances stuff pretty seriously..

In case you haven't got it here's his main site: http://www.stern.nyu.edu/globalmacro/