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Kuros
Joined: 27 Apr 2004
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 Posted: Mon Jul 28, 2008 7:40 pm Post subject: Re: 11 reasons America's a new socialist economy |
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| visitorq wrote: |
| mises wrote: |
| mindmetoo wrote: |
Seriously, if you can get the Chinese to take slips of paper and ship you computer chairs and tshirts why would you want to change this system? Eventually those slips of paper come back in the form of purchasing things that the Chinese can't move out of the country like office buildings or developing condo projects or industrial parks. |
Yeah, and the rents go back to China.
America is in massive debt to China. What American consumers, state/municipal/federal government has done is passed consumption for tomorrow to the Chinese for consumption today. In addition, this has placed the United States at a very serious rick of an 1997 AFC style financial crises that could rip apart the value of the dollar.
And anyways, the system is totally unsustainable and is unwinding now. The retrenching of the American economy away from consumption/borrowing and towards production/savings could very well lead to a devastating economic depression in the very near future.
Here is how Peter Schiff explains the situation (I'm summarizing from the lecture he gave, which is linked below):
5 Asians and 1 American are stranded on an island. They divy up the work load. 1 Asian hunts, another fishes, another gets veggies, another gets wood for cooking, and then it comes down to the American. What does he get? The American gets assigned the job of eating.
At the end of the day, the Asians sit down at the table to feed the American, who sunned himself on the beach (a service economy). A modern economist would say the America is key to the equation. Without the American, the Asians would be out of work.
The reality is the Asians are perfectly capable of consuming these products themselves. The best thing they can do is kick the American off the Island and consume the goods themselves.
http://kr.youtube.com/watch?v=6G3Qefbt0n4
The island is the Bretton Woods 2 system. The Asians prop up the dollar, hold down the value of their currencies and ergo shift consumption from the people creating things to the Americans. This will change. The Chinese now have massive economic power over the United States, and it is because the current global currency situation is dysfunctional and has been totally abused by the Federal Reserve. |
I'm not sure I really get that analogy... I mean, if 'Asia' had an economy 5 times bigger than the US, that would make sense, but actually the US economy is larger than all of Asia combined. Obviously China cannot consume the stuff they make for export to the States, because most of that stuff is too expensive for the average Chinese. That's why Asia is full of export economies, no?
Even Japan has a big problem in that despite having many world-beating companies like Toyota, the domestic economy is in the doldrums due to lack of consumer spending. That's where the US picks up the slack. |
The other reason why the analogy rings false is because of the smile curve; production is a small piece of the revenue pie between design/legal issues and distribution/retail.
Yet another reason why the analogy rings false is because only two or three of those Asians are participating in the economy, the other two or three are in the Chinese hinterland living in a feudal economy barely touched by modern progress.
Too pat. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Jul 28, 2008 8:21 pm Post subject: |
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No analogy is ever perfectly accurate, but Schiff's comes very close.
Asia (meaning mostly China and Japan) does prop up the dollar to stimulate American demand for their exports. The US dollar is dramatically overvalued due to this.
In addition, China is keeping the Yuan low to keep costs down and spur exports. The Japanese carry-trade functioned for years in a similar manner. Around 1.2$trillion were dumped into global markets with the yen carry trade.
The Asians are producing far beyond their consumption and the American consuming far beyond their production. Little green pieces of paper make up the difference. This is not sustainable and eventually the Asians will stop propping up the dollar. Stopping the propping is kicking the Americans off the fictitious island.
The United States now borrows 5-6$ for every dollar increase in GDP. And these dollars aren't going, as you have mentioned, into investments in the future (infrastructure) but to plasmas, bottle service, Ed Hardy shirts and equity extraction. We are frivolously consuming now and paying for it later. They are paying for our consumption now and we will pay for theirs for decades to come.
The budget deficit is half a trillion now. 45 trillion in aggregate American debt. Another 45 or so in medicare/medicaid/SS. An 11.5 trillion GDP. There are more USD100$ bills circulating in Russia than the US. The world is awash with dollars that are rapidly decreasing in value (45% this decade alone). All the smile curves can't change this. The system will be unwound.
Anyways, the idea of Americans selling each other stuff they didn't produce and can't afford as "productivity" and not "debt" is based upon the global dollar standard.
The flaw in the analogy lies elsewhere. The Asian states have macro issues of their own that Schiff neglects. But that doesn't change the dire American situation. Nor is America the only one in trouble. |
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visitorq
Joined: 11 Jan 2008
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| Posted: Mon Jul 28, 2008 8:39 pm Post subject: |
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| mises wrote: |
No analogy is ever perfectly accurate, but Schiff's comes very close.
Asia (meaning mostly China and Japan) does prop up the dollar to stimulate American demand for their exports. The US dollar is dramatically overvalued due to this.
In addition, China is keeping the Yuan low to keep costs down and spur exports. The Japanese carry-trade functioned for years in a similar manner. Around 1.2$trillion were dumped into global markets with the yen carry trade.
The Asians are producing far beyond their consumption and the American consuming far beyond their production. Little green pieces of paper make up the difference. This is not sustainable and eventually the Asians will stop propping up the dollar. Stopping the propping is kicking the Americans off the fictitious island. |
I still don't get it though - just because Asian countries produce more goods doesn't mean they can fill the demand, which is created by adding value to the products in the US (see Kuros' smile curve).
In the case of Japan, the added-value is there, but people don't actually buy the stuff enough. America has both: high market prices, and a populace who consumes a lot. This is the demand side of the supply/demand equation (what confuses me is actually how the debt even matters, so long as the gears keep turning).
So the question remains, if you take the US out, who's going to buy all the stuff? If nobody, then it'll be the biggest recession/depression the world has ever seen, and nobody wants that.
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The United States now borrows 5-6$ for every dollar increase in GDP. And these dollars aren't going, as you have mentioned, into investments in the future (infrastructure) but to plasmas, bottle service, Ed Hardy shirts and equity extraction. We are frivolously consuming now and paying for it later. They are paying for our consumption now and we will pay for theirs for decades to come.
The budget deficit is half a trillion now. 45 trillion in aggregate American debt. Another 45 or so in medicare/medicaid/SS. An 11.5 trillion GDP. There are more USD100$ bills circulating in Russia than the US. The world is awash with dollars that are rapidly decreasing in value (45% this decade alone). All the smile curves can't change this. The system will be unwound.
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$45 trillion debt around the world? Never heard of that before...
As for the budget deficit, even half a $trillion doesn't seem so dire when you consider the GDP is around $13 trillion.
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| Anyways, the idea of Americans selling each other stuff they didn't produce and can't afford as "productivity" and not "debt" is based upon the global dollar standard. |
How did America get rid of its debt last time?
Last edited by visitorq on Mon Jul 28, 2008 8:46 pm; edited 1 time in total |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Jul 28, 2008 8:45 pm Post subject: |
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| if you take he US out, who's going to buy the stuff? If nobody, then it'll be the biggest recession the world has ever seen, and nobody wants that. |
Yes. That is why the situation is described as a Nash Equilibrium.
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| Most of that debt is internal though, right? Even half a $trillion doesn't seem so dire when you consider the GDP is around $13 trillion. |
Half a trillion is the deficit. The US sovereign debt is officially at 9.5 trillion. The debt of the state/muni governments, plus corp bonds and all consumer debt is 45 trillion.
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| How did America get rid of its debt last time? |
When?? Do you mean when the dollar was on the skids after Vietnam? Paul Volker raised rates really high for quite a long time and blew out the monetary policy of the previous government. I'm unaware of, in modern times, an elimination of total debt. There was good action against debt during Clinton, I think.
As a side, Obama is apparently having an economic conference soon. He has as advisors Buffet, Volker and some others. It would be a very good thing if those two men had his ear over his 4 years. |
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visitorq
Joined: 11 Jan 2008
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| Posted: Mon Jul 28, 2008 8:56 pm Post subject: |
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| mises wrote: |
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| if you take he US out, who's going to buy the stuff? If nobody, then it'll be the biggest recession the world has ever seen, and nobody wants that. |
Yes. That is why the situation is described as a Nash Equilibrium. |
Any consensus on if it's good or not?
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| Most of that debt is internal though, right? Even half a $trillion doesn't seem so dire when you consider the GDP is around $13 trillion. |
Half a trillion is the deficit. The US sovereign debt is officially at 9.5 trillion. The debt of the state/muni governments, plus corp bonds and all consumer debt is 45 trillion. |
I gotta admit, I'd not heard such a high amount as 45 trillion before. That's pretty mind-boggling (wasn't aware that much money even existed on the whole planet).
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| How did America get rid of its debt last time? |
When?? Do you mean when the dollar was on the skids after Vietnam? Paul Volker raised rates really high for quite a long time and blew out the monetary policy of the previous government. I'm unaware of, in modern times, an elimination of total debt. There was good action against debt during Clinton, I think.
As a side, Obama is apparently having an economic conference soon. He has as advisors Buffet, Volker and some others. It would be a very good thing if those two men had his ear over his 4 years. |
Yeah, I meant during the Clinton years. Just raising rates doesn't seem enough though, that only stops future debt from accumulating, but doesn't necessarily get rid of the debt already existing. If America's always been in debt, maybe that's just the way it ought to be. As long as the folks in charge can stop a major crash that is. Capitalism's a hard system to wrap one's head around.  |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Jul 28, 2008 9:04 pm Post subject: |
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| I don't know if objectively the system is good or not... My opinion is that it is. Seems that many are pretty worried about it unwinding. |
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mises
Joined: 05 Nov 2007
Location: retired
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Wed Jul 30, 2008 3:01 am Post subject: Re: 11 reasons America's a new socialist economy |
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| mises wrote: |
| mindmetoo wrote: |
Seriously, if you can get the Chinese to take slips of paper and ship you computer chairs and tshirts why would you want to change this system? Eventually those slips of paper come back in the form of purchasing things that the Chinese can't move out of the country like office buildings or developing condo projects or industrial parks. |
Yeah, and the rents go back to China. |
Which then comes right back in the form of another investment. I'm not sure if you fully grasp Chinese don't spend American dollars on their streets and shops and stock markets. Investments invariably mean a more efficient american economy. You don't invest your money in something that will lose value. Things gain value by being more efficient. America is one of the most productive nations on the planet, if not #1.
http://www.nytimes.com/2007/09/04/business/worldbusiness/04output.html
I want you to grasp that productivity and putting money in foreign hands are actually connected. America puts large numbers of dollars in foreign hands who have no choice but to recycle them into profit earning ventures.
Think about how much the American population and economy has grown since the 1970s. And would you believe today Americans only use 15% more oil?
http://www.forbes.com/forbes/2008/0630/038_print.html
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| America is in massive debt to China. What American consumers, state/municipal/federal government has done is passed consumption for tomorrow to the Chinese for consumption today. In addition, this has placed the United States at a very serious rick of an 1997 AFC style financial crises that could rip apart the value of the dollar. |
If you hold billions of dollars and you knew dumping them would reduce their value to low amounts, what would you do? You wouldn't take American dollars if you viewed them as being backed by nothing, or less, in the future. And you wouldn't do anything with those funds to jeopardize their value. And what if the Chinese suddenly want to give back Americans dollars for a fraction of the value? Is that a bad thing? If you sold a house to someone for $100,000 and now he wants to sell it back to you for $20,000, who is the loser in this arrangement?
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| And anyways, the system is totally unsustainable and is unwinding now. |
I've heard that every few years for the last 3 decades. The communists always used to claim any economic storm was proof capitalism was unsustainable and was the beginning of the end.
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| 5 Asians and 1 American are stranded on an island. They divy up the work load. 1 Asian hunts, another fishes, another gets veggies, another gets wood for cooking, and then it comes down to the American. What does he get? The American gets assigned the job of eating. |
Given America is the world's largest manufacturing economy, the major premise of this is false.
http://cafehayek.typepad.com/hayek/2006/02/we_dont_make_an.html |
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visitorq
Joined: 11 Jan 2008
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| Posted: Wed Jul 30, 2008 6:09 am Post subject: |
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| I pretty much agree with your analysis mindmetoo. Still curious though (if you have any thoughts) - how much debt is too much? Or is there even such a thing, in the US's case? Could an insane amount of debt (like even way more than we have already) ever lead to a full on collapse? If so, how? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Jul 30, 2008 7:05 am Post subject: |
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What you need to do is think about why commodity prices are denominated in dollars, why central banks accumulate dollars (a process you seem to mistake with investing back in the United States) and how long this will go on for. Or, do you believe that the system of fixed exchange rates and dollar pegs will last forever? That is the system, and if you follow macro news, you'll know that it is unwinding already.
The Bretton Woods 2 system is a politically established system, not one that grew naturally from market forces. It is the legacy of a post-WW2 America, and the cornerstone of American economic hegemony.
You mix up consumption and investment in the American market. When China lends the US money, largely it goes to consumption, not investment. It now takes the United States 6$ of borrowed money to create 1$ of GDP growth. That's one hell of an efficient economy.
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| Given America is the world's largest manufacturing economy, the major premise of this is false. |
The United States imports significantly more than it exports in dollar terms. About 60billion a month. This is only possible because she has designed a monetary system that allows significant over consumption. Final answer. The Americans, from top to bottom, are broke. Consumers are broke. Cities are broke. States are broke. The Federal government is so far beyond broke it is scary. All they have is the hope of a gravy train of debt can continue so their consumption beyond their means can continue. The whole system, especially the entitlement programs and consumer debt, depend vitally on being able to borrow for ever from the rest of the world whatever amount of money is needed for whatever reason and have them not reinvest the money as it would cause inflation.
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If you hold billions of dollars and you knew dumping them would reduce their value to low amounts, what would you do? You wouldn't take American dollars if you viewed them as being backed by nothing, or less, in the future. And you wouldn't do anything with those funds to jeopardize their value. And what if the Chinese suddenly want to give back Americans dollars for a fraction of the value? Is that a bad thing? If you sold a house to someone for $100,000 and now he wants to sell it back to you for $20,000, who is the loser in this arrangement? |
So, you are repeating why I wrote earlier in the thread. The system is a Nash Equilibrium, or very close to, and an end to the situation will be very difficult. You just don't understand inflation, and how a move away from dollar pegs would drive the value of the dollar into the ground (in addition to the 40% this decade).
Now, you need to think about how this system can be undone. What will be the cause. The system will be messily unwound or orderly depending on international cooperation and negotiation or could be blown out of the sky by a black swan. It is impossible to tell. What we can tell is that this system is being thoroughly mismanaged by the American Fed and is driving the value of the dollar into the ground. In addition, Chinese accumulation of $ is keeping Chinese wages and PPP much lower than it would otherwise be. The massive amount of excess liquidity is fueling commodity speculation, feeding asset bubbles all over the world and generally making macro economics less stable.
The bretton woods 2 system is merely one of hundreds of monetary arrangements between states that has existed. To assume it will continue simply because it exists is absurd.
http://tinyurl.com/5u6ylr
http://blogs.cfr.org/setser/2007/06/20/does-bretton-woods-2-end-with-a-bang-or-with/
Edited for url and to add the link below:
http://www.investorazzi.com/2008/07/30/marc-faber-jeremy-grantham-warn-of-global-bubble/
Last edited by mises on Wed Jul 30, 2008 1:53 pm; edited 1 time in total |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Wed Jul 30, 2008 1:46 pm Post subject: |
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Mises could you put that very very long url in a proper
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| [ url=http://www.url.com][/url] |
tag? It does terrible things with my screen and I don't much feel like having to make my r/l scroll bar dance to read your points.
Thanks. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Jul 30, 2008 1:50 pm Post subject: |
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| Ah, sorry. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Wed Jul 30, 2008 1:53 pm Post subject: |
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| visitorq wrote: |
| I pretty much agree with your analysis mindmetoo. Still curious though (if you have any thoughts) - how much debt is too much? Or is there even such a thing, in the US's case? Could an insane amount of debt (like even way more than we have already) ever lead to a full on collapse? If so, how? |
Debt is fine as long as it doesn't constitute a large % of your GDP or income. If your economy grows by 200% and your debt grows by 190%, you're not worse off.
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
Cuba has a very low ratio compared to the USA but oh well.
60% sounds like a lot but consider you make $50,000 a year and have a $200,000 mortgage. Your ratio is 400%. But many people would judge that as pretty manageable. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Wed Jul 30, 2008 5:07 pm Post subject: |
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| mises wrote: |
| When China lends the US money, largely it goes to consumption, not investment. |
Says who? And what's the difference?
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| It now takes the United States 6$ of borrowed money to create 1$ of GDP growth. That's one hell of an efficient economy. |
Says who?
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| The United States imports significantly more than it exports in dollar terms. About 60billion a month. |
That's current account. Which is balanced by the capital account. It takes in far more investment than it sends out. So again we come back to this: China sends us very useful stuff at a great price that makes us more efficient and comfortable. In return we give them slips of paper. Those slips of paper they bring back and exchange for static things like property and buildings.
Again, who is the loser in this arrangement? America has had a trade deficit for decades and decades. In all that time, Americans have grown richer and more comfortable and more efficient. Odd that, no?
Last edited by mindmetoo on Thu Jul 31, 2008 2:51 am; edited 1 time in total |
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Nowhere Man
Joined: 08 Feb 2004
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| Posted: Wed Jul 30, 2008 6:42 pm Post subject: ... |
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Asia (meaning mostly China and Japan) does prop up the dollar to stimulate American demand for their exports. The US dollar is dramatically overvalued due to this.
In addition, China is keeping the Yuan low to keep costs down and spur exports. The Japanese carry-trade functioned for years in a similar manner. Around 1.2$trillion were dumped into global markets with the yen carry trade. |
Since the Yuan is pegged to the dollar, I'm not sure the above makes sense.
Yes, the yuan is low, but the dollar is low as well. As such,a rising dollar would actually be a bad thing for the US. IOW, the dollar isn't overvalued.
If it were, then waeguks in Korea could rest easy. My take: the US economy is in bad times. In a game of currency chicken with China, the dollar has been undervalued for about five years. There is but little hope for it to rise at a time that a rise will not be beneficial.
A rising dollar would hurt the US and Korea, no?
And while we're here, let's make this about you. Didn't thepeel (in between rapture about the muslim menace) say he wasn't worried about all of this?
Is that why you changed accounts?
Last edited by Nowhere Man on Wed Jul 30, 2008 6:46 pm; edited 1 time in total |
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