# The U.S. Economy: Stand by for more worse news

Discussion in 'Business & Economics' started by Brian Foley, Nov 28, 2010.

1. ### Brian FoleyREFUSE - RESISTValued Senior Member

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The Globalist Libertarian/Freemarketeers wanted a planet free of economic borders, and they got it. And now that the planet is free of such borders, like a building free of fireproof doors or a ship free of watertight bulkheads, the entire structure is in danger of total destruction. Globalisation is removing the fire doors and fire barriers ready for a wildfire when the fire happens, it destroys everything.

3. ### kmguruStaff Member

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I hope our resident scientist Billy T is keeping up with it...

5. ### JuNieRegistered Senior Member

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It's almost like a perfect shit storm.

7. ### kmguruStaff Member

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This time, we have the benefit of the internet and independent blogs so that the real story and data can be maintained for posterity.

In all past problems by any country or society, the root cause has been doctored or the information has been sanitized such that it is difficult to discern what is what!

For example, we know that financial engineering killed Ireland....not their potato famine...

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9. ### joepistoleDeacon BluesValued Senior Member

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The China - Russia trade is a nit. So it has no impact on the global economy. Additionally Iranian trade is a nit as well.

As long as the US is the preeminent military force in the world, the dollar will be the reserve currency...no matter what else happens.

When ever there is a crisis, where do international investors put their money? In US dollars, and you don't have to look far to find a recent example.

10. ### nietzschefanThread KillerValued Senior Member

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Joe,

Many investors are very un-characteristically and un-historically fleeing to GOLD and SILVER right now. That will become the "reserve currency", like it or not.

11. ### The EsotericistGetting the message to GarciaValued Senior Member

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Unfortunately, a large portion of the gold in the world is counterfeit.

12. ### joepistoleDeacon BluesValued Senior Member

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I seriously doubt that we will ever again return to a commodity backed currency...assuming we do not evolve back to the stone age. Commodity backed currencies are not the utopia people like to fantasize about these days. There are many good reasons why we left the gold standard many decades ago.

http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml

Those investors are also fleeing to the dollar. That is why the Euro has and continues to fall against the dollar.

13. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

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While China/Russian agreement to avoid dollar in bi-lateral trade is important, as both are large, its far form the first or unique. At least a dozen different central banks, including Brazil's, have exchanged currencies and now hold small amounts of their reserves in Chinese Yuan, but they are not used for much, I think.

Originally idea was they could be used instead of dollars for settling trade imbalances, etc. but AFAIK, they mainly just site static in central bank reserves.

More important, IMHO, is the June 2010 agreement between China and British bank, HSBC. Already merchant in 34 countries have borrowed Yuan from HSBC to pay for imports from China, in Yuan. I.e. the huge recycling loop where China gets dollars from its trade surplus with the US and then lends these dollars back to the US by buying US treasury bonds is getting a "little sister" that seems to be rapidly growing.

I.e. China supplies HSBC with yuan which return to China to close the loop as merchants buy Chinese goods. I assume the merchants buy these Yuan from their local branch HSBC with their local currency and that it goes to China for more Yuan sent to HSBC.

Certainly, China wants to hold currencies other than dollars in its reserves, and has decreased the number of dollars* it holds in its reserves, despite the continued in flow of its trade surplus. (By using dollars to lock up long-term supplies of energy (especially oil), food stocks, a raw materials.) For example about two years ago, China gave Brazil's PetroBras 10 billion dollars, which will be repaid by getting 200,000 barrels of oil per day for 20 years.

See more on this in my post at:
http://www.sciforums.com/showpost.php?p=2647680&postcount=310

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* Nearly a decrease of 100 billion in dollars in China's reserves in last 12 months, if memory serves me correctly.

14. ### nietzschefanThread KillerValued Senior Member

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Yet, according to the Economist, the U.S is maintaining -600+B trade balance for months. So basically those people fleeing to the dollar are very stupid. Take advantage and move your U.S dollars while you still can make a profit.

15. ### joepistoleDeacon BluesValued Senior Member

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Well you had better tell those folks at the Economist to check their numbers. Because they are wrong.

About half the US trade deficit is due to crude oil exports. And for all of the rhetoric in the press, the US still is a signficant exporter of goods and services. China and Germany are slightly ahead of the US in exports, but not by much.

And the US economy is still the largest economy in the world. ..about three times larger than its nearest competitor (Japan). So for all the talk of gloom and doom, the US is still a very signficant and powerful country.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Last edited: Dec 1, 2010

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I agree if your time horizon is more than two years, but currently for a shorter time frame, the dollar may be the winner in the "least ugly contest." Even gold may need to sit about where it is (or at least below $1500/ oz) for two years to digest its rapid run up as people take profits and slow its continued climb. Recall, I predicted several years ago the the run to get out of the dollar would occur no later than Halloween 2014. Subsequently about a year ago, without changing that prediction, I suggested that Obama & Bernanke would probably be able to delay the run on the dollar until Obama's first (and only) term as POTUS is over but buying that delay will add many trillions to the US's already unpayable (in purchasing power) debt. Yes, for now at least, the dollar is the "least ugly beauty queen" so for now enjoy the dance, but be sure to dance near the exit door. Last edited by a moderator: Dec 1, 2010 17. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member Messages: 23,198 That depends on how you measure it. In dollar value, yes, but in terms of goods and service produced China is already ahead of Japan and will pass the US in 2012! See / understand why this is true and link to data source at: http://www.sciforums.com/showpost.php?p=2651596&postcount=331 18. ### quadraphonicsBloodthirsty BarbarianValued Senior Member Messages: 9,391 This directly contradicts your repeated (and correct) obvservations that Obama and Bernanke are currently doing everything they can to weaken the dollar. Which would be the exact opposite of what somebody trying to delay a run on the dollar would do - if the concern is that foreign holders of dollars will be spooked by the prospect of a weaker dollar, then they should be doing everything in their power to strengthen the dollar. 19. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member Messages: 23,198 No, not a contradiction. It is a question of timing. The dollar is as I said currently (and perhaps for even two years more) the "least ugly beauty queen." Driving its value down a little, without losing control in a run, is the best way to delay the inevitable run to get out as for the next year or so, that lower value dollar will boost US exports, reduce imports and the trade imbalances to give "short sighted" foreign investors confidence that holding dollars is secure. One day, a little later than others, they will "wake up" and try to get out too when only half their purchasing power lost, before even more is lost in the accelerating run on the dollar. Significantly strengthening the dollar would make even the dumbest investors realize that the US's debts were already unpayable. Now they can hope that a controlled weakening plus some recovered growth will let them get their investment back. Last edited by a moderator: Dec 1, 2010 20. ### quadraphonicsBloodthirsty BarbarianValued Senior Member Messages: 9,391 Who are these "short sighted" investors, and how are they influential enough to make a difference? Not major dollar holders like China, Japan, Europe and the Arab states, all of whom have been publicly furious at the pro-inflationary steps being taken. They're seeing billions in assets wiped out by these policies, right now, and are openly unhappy with it and looking for ways to avoid absorbing even more dollars (as you so frequently remind us). Meanwhile, exports and trade imbalances are not being affected, since China is pointedly refusing to play along and Europe is suffering a banking crisis. What's happening is that the asset sheets of dollar holders are being degraded, and US entities are accumulating all the attractive foreign assets they can get their hands on with the cheap money. This is not a confidence game to boost demand for the dollar - it has exactly the opposite effect, by design. There is no need to boost demand for dollars, given the rock-bottom rates we're currently paying to borrow. Rather, this is a concerted effort to leverage that demand in order to devalue American debts and accumulate foreign assets. It works exactly because a run on the dollar would cost places like China, Japan and Europe trillions and so destabilize their economies, while eliminating the US national debt. A run on the dollar would wipe out a trillion or more in Chinese assets - that's like 25% of GDP, a nightmare scenario for the CCP. It would be as if all those years of trade surpluses never happened, and China had just shipped us goods for free instead. That's very bad for China, and very good for the USA. Just as the dollar is the least-bad investment in hard times, the US would be the least-injured party in a run on the dollar. And so, perhaps counterintuitively for some, everyone else fears such an outcome more than the USA does. That's why it won't occur, and why the USA can get away with inflationary policies. It's like the old saw: "If you owe the bank$100, that's your problem. If you owe the bank \$100 million, that's the bank's problem."

Doesn't compute - US debts are denominated almost entirely in nominal (not inflation-adjusted) dollars. They can't be "unpayable" because the US can just print whatever amount of dollars is required (thereby weakening the currency appropriately). Deflation makes people happier to hold and accumulate dollar-denominated debt. Inflation works the other way. You might as well be arguing that up is down here.

Growth doesn't compensate debt holders for depreciated dollar holdings. They just get paid in the depreciated dollars. The beneficiaries of the growth are others - which is, again, exactly the point here: we're running inflationary policies in order to soak holders of our debt while improving our own position.

So, once again, you've tried to have it both ways in your rhetoric and ended up in a self-contradictory morass. I suggest you stop digging the hole deeper, and instead pick a consistent viewpoint and stick with it. While this will prevent you from claiming vindication irrespective of what actually transpires, it will have the advantage of giving people a reason to listen to you.

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22. ### joepistoleDeacon BluesValued Senior Member

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I don't think anyone would dispute China's growth and potential. But here is the rub, inflation. China's aggressive growth and currency manipulation has brought about another unwanted monster....inflation. Inflation...the very monster that is supposed to be eating away at the US dollar.

China is not trouble free and its fate is not written in stone. It has recently implemented price controls to control inflation. Unfortunately for China, the story on artificial price control is not a pretty one. It ususally creates supply shortages. China does indeed have a tiger by the tail. Only time will see if the tiger gets China or if China gets the tiger.

http://money.cnn.com/2010/09/10/news/economy/chinese_economic_reports/index.htm

http://www.moneynews.com/StreetTalk/China-Raise-Rates-Inflation/2010/11/19/id/377574

Currency manipulation does have a price and the game can be played by more than one player.

23. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

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Yes China has problems - most of the world does now, but China's are to a large extent intentionally created as part of their rush to switch to a domestic market economy and reduce the need to export to the US & EU, which will be less able to buy as they are broke - needing bail outs, loans and printing press money (QE3 ?) just to avoid immediate collapse.

I.e. When you increase real salaries (purchasing power) by double digits, that makes an immediate step up in internal demand, but factories that have been geared for the export market can not immediate crank out enough goods to absorb those new Yuan in the population's hands. Thus, they bid up the prices of what is available (housing, especially)* and switch to eating more pork and less rice, etc. to make food cost rise.

Not every Chinese has enjoyed double digit gains in his annual purchasing power. The old (retired) find the rapid increase in food prices hard to cope with so yes, China is imposing price controls on food. Yes that will divert some supply to the black market, etc.

All this is an unavoidable consequence of the drive to rapidly grow the domestic market. The CCP, I think wisely, has decided these transition problems are the lessor evil when compared to continuing an export oriented market. I.e. I think they, like me, expect US & EU demand to collapse with the collapse of the dollar. China's exports to Asia are surging and will continue to do so as US & EU sink into deep, long lasting, depression.

In less than two decades, Asia will be the "sphere of prosperity" and rest of the world that supplies Asia with needed imports of food stocks, energy, and raw material will become their "economic colonies" (Brazil will be one). If not one of Asia's economic colonies, times will be quite hard for those nations.

The US is blessed with coal and a fertile mid west farms, so that small part of the US economy will survive OK, but only a tiny fraction of Americans are farmers or coal industry workers (or railroads and port workers shipping coal and grains to Asia.)

Yes. Unfortunately, most of the world is trying to make their currency less valuable than that of others - clearly an impossible task that will damage trade, not increase it as each hopes.

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* The government controls the banks and limits their loans; however, informal loans exist to meet the high demand. Even some local governments, wanting their region to prosper are supplying loans.

Last edited by a moderator: Dec 1, 2010