An Overview of American Economic Issues in Plain English (Part 1) (employment, Iran)

[Jason_Els]

This is a combination of a few things I've written about this before but I think they bear repeating. Keep in mind I'm an Austrian economist at heart as libertarians usually are. It's dense, but please stick with it.

Background

You know that the US has a budget every year and that we pay for that budget by levying taxes and tariffs. When the US government spends more money than it takes in, there's a deficit; a shortfall. Now, to cover that shortfall, the US government sells bonds. We cover the shortfall from the money taken in from sale of those bonds. Once the government sells a bond it then creates ten times the amount of that bond as money available to spend. That's what they do, illogical as it sounds. We sell, on average, about 380 million dollars of these bonds every week. The primary buyers of these bonds are Japan and China but every country in the world does because those bonds represent an IOU from the US government and, in this world, an IOU from the US government is seen as money in the bank. These countries then use those IOUs to back their own currency or buy oil. You can only buy oil in US dollars. There are only two oil exchanges in the world, in London and New York. Both only take US dollars. So if you're from any other country in the world, you need dollars to buy your oil. Because of this, there is always a market for US dollars or, in this case, the next best thing: the IOUs.

Now we've been doing this for quite a long time and as a result, there are trillions of dollars of debt out there in the rest of the world sitting in vaults or changing hands outside of our shores.

As you probably know, inflation isn't the increase in prices. Inflation is printing (or these days pressing a button on a computer) more money than your economy can back. When you create more of something, anything, the less valuable it becomes. If you own the only car in the world it would be worth billions. As there are millions of cars, yours isn't worth so much. Same with dollars. Our government makes our dollars worth less every day when they "print" this extra money to pay their bills. It doesn't impact us here in the US nearly as strongly as it should because those dollars get locked away or change hands only among a few different governments. Back to the car analogy. You have your car but lets say there are millions of other cars only they are locked away in a giant cavern someplace. Your car is still worth a huge sum because it's not one of the ones locked away that nobody else can use.

Same deal with those offshore dollars. So long as those dollars don't come back to the US, we're generally alright.

Now all those bonds require us to pay interest on them, like any other bond. That debt is serviced by our taxes. At some point, there will be so much interest that we will not be able to raise enough taxes to service those payments and run the country at the same time. As there is no money in the Social Security trust fund and as there are so many more baby boomers than younger taxpayers in the US, our government is going to need a hell of a lot more money than it does now. How will we cover that shortfall?

Well, we could raise taxes to European amounts, stifling economic development, reducing the standard of living, and gutting our military.

OR

We could start printing money to pay for the money we're printing. We wouldn't have to raise taxes, stifle economic development, hurt the standard of living, or gut the military! How does that work? Well let's say you've sold $1 billion dollars in bonds to (say) Thailand. Thailand gave you $1 billion dollars today and you turned it into $10 billion dollars, giving Thailand an IOU (a bond) for $1.1 billion dollars. But if you keep printing money then the value of that $1 billion declines. In a few years, $1 billion only buys what $100 million does. Remember the rule, the more dollars are out there, the less valuable each existing one becomes. In a few more years, you're printing money so furiously that the $1 billion Thailand gave you was spend when $1 billion was worth $1 billion but now, let's say 10 years later, that $1 billion now only buys $10 million worth of today's goods. Your bond comes due and you pay Thailand $1.1 billion. Only it's not worth $1.1 billion now, it's only worth $11 million. Here's an example:

2007 $1 billion buys you a complete AEGIS cruiser. Thailand pays for that cruiser via the IOU they give you only because we print 10x the amount, we actually get $10 billion in today's dollars. 10 AEGIS cruisers! Yaay! Go us!

2017 $1.1 billion buys you only the radar system on one AEGIS cruiser.

Thailand has, essentially, given you far more value than you're paying back to them because, over time, that $1 billion buys less and less because you're printing so much money that all money (and everything denominated in it) becomes worth less than it did before.

If you were a politician, which would you choose?

I thought so.

The problem with the second option is that it starts a vicious circle of printing money to pay for printing money to print money to pay for money, ad infinitum. Because our IOUs would then be losing value rapidly (all that printing dilutes the value of existing money), countries that hold them will dump them to anyone willing to buy them only nobody will. So all that money we've sold to the rest of the world will come flooding back to us. This is bad because we'll have billions of dollars floating around here in the US, effectively devaluing the money we hold now. This is what is called a hyperinflation and it is the doom of all fiat currencies. It's happened in other countries before and it's happening now in Zimbabwe and others. It will happen to us because our government is doing exactly what has caused hyperinflations to happen elsewhere.

This second option is what's called, "monetizing the debt."

Those on fixed incomes are screwed because while their incomes stay the same, the value of that income will drop drastically. Imagine having an income of $50,000 a year now as a retiree and going to the grocery store and ringing-up a bill of $2,000 for a week's worth of groceries. The following week it's $3,000 for exactly the same items but your income hasn't gone up one iota. Imagine this going on for a few years.

You might ask, well what about all those dollars other countries need to buy oil? Well Russia, the world's second largest oil producer, is creating their own oil bourse only it will be denominated in rubles. Norway is creating a bourse denominated in euros. Iran has a bourse too and it too will use euros. Countries won't have to buy oil in dollars any longer.

You might also ask, "But it's the US! We're still the most stable country and what other backing is more stable than IOUs from the USA?" Other countries are asking that too. A few countries have already began to quietly sell their American debt, a little at a time. It is, however, like a game of musical chairs. Everyone knows the IOUs in their vaults are becoming worthless but nobody wants to incite a panic sale for fear they won't get a good price when they sell. The US government is encouraging this behavior. They, and the world, want to see an orderly sale. Again, other countries have been down this road before and the end has always resulted in panic selling with plenty of people and governments getting stuck with grossly devalued IOUs which become, essentially, worthless.

Would you want to invest in a country whose debt and unfunded obligations to itself are worth more than the entire country itself? A country that's issuing more and more of these IOUs but will clearly be unable to pay them back? Well no, of course you wouldn't.

Or would you?

Perhaps that country desperately needs the money to keep its government in power. Perhaps its leaders are willing to trade away that country's hard-earned resources, influence, and military might in return for you buying some of those IOUs. Perhaps that country has the richest market in the world full of people who can't control their spending and have a financial system that actively encourages its people to go into debt they can't possibly repay. Perhaps YOUR country wants power and wants to be sure that when the debtor country collapses that it does so with such force and finality that it no longer poses any threat to your country's ambitions.

Is invasion necessary? Hell no. There's no point in invading the US and even if we are broke, we still have the poison pill of a massive nuclear arsenal at our disposal. No, like the USSR we will be left to languish in the mire of our own misery, visited by foreign investors coming to take our resources for their own needs. Like Russia and the former USSR republics, we'll survive, albeit at a greatly reduced standard of living. Unlike the USSR, however, we won't have a landlord who suddenly goes missing. The banks and the creditors will still be here, evicting us from our defaulted homes and farms, bankrupting us with our unpaid credit cards, and then taking what remains and selling it all to foreign investors while the few at the top who've profited either go elsewhere or live in posh gated communities with legal police forces carrying automatic weapons.

At that point the government will become fractured and then all bets are off. I don't know what will happen, but we'll survive one way or the other. People and cultures survive changes of government. History tells us the vacuum created by such an economic collapse results in any number of things: a dictator, a civil war, a revolution, or a reign of terror. We don't know.

I don't believe there's a secret world body doing all this. History again tells me that these chains of events happen because the same decisions are made to solve the same problems which result in the same conclusions over and over again. Destroying the wealth of the US and the stability that wealth brings, is a bad thing for the world as we represent such an enormous market and act as the world's military and diplomatic stabilizer. As much as China would like, it's in no position to take over that role at this time or even a time in the near future and the Chinese leadership are not fools. They know China isn't yet ready to be the world's superpower. Europe certainly doesn't want it because Europe lives a good life funded, in part, by the US effectively giving Europe free military protection. Russia would love to see the US collapse but Russia is like China. Russia is busy rebuilding, busy trying to keep its entire ship afloat. It doesn't have the stability to take on the world. Japan has the stability and the power but doesn't have the military, particularly not with China on its doorstep and the history of bad relations between the two. None of them want a sudden upheaval in the US. It's bad for business and bad for global stability.

Debt monetization is, essentially, the process of printing money to pay for the printing of money.

If the government issues a bond, let's say $100 that pays 5%, then it essentially has to pay the bond purchaser $105 down the road. In the mean time, the government would take the $100 it received from the bond purchaser and add it to its assets. Usually, that bond is paid for by collecting taxes, fees, and tariffs, and then repaying the lender using those moneys. What monetizing does is that the rather than doing that, the government just creates the $105 out of thin air to pay back the bond purchaser. While it may not make much of a difference to you, it's a big deal in economics because it essentially means that the printing of that new $105 devalues all the existing dollars out there, making the value of the money less than it once was.

The goal of investing is to increase the value of one's financial holdings. When someone buys a government bond they are doing so with the expectation that when the bond expires, the buyer will receive more money than they gave the government. Monetizing reduces the value of the money the government originally took in. So the $100 bond you buy today, even with the additional $5 you make in profit, will only be able to buy $85 in todays goods when the bond comes due. According to accounting principles, the bond investor made money. After all, he took $100 and got $105 back, however since the government printed money to pay for the money it took in and thus devalued its money, the investor's $105 now only buys $85 worth of goods. The investor made a theoretical profit, not a practical one.

2007 with $100 can buy only 50 widgets

2010 with $105 can buy only 35 widgets

In that three year span, government printing of money to pay for money caused the value of all money to decrease because so much more money was added to the economy without creating any new value to back it and thus support its value.

In a perfect economic system, a government should only print enough money to reflect the value of its economy (or gold holdings). As the economy grows, so can grow the money supply because there would be no inflationary effects. But if the economy contracts, then the government should withdraw money from the system to prevent inflation. By doing that, the value of the currency remains constant and so the economy remains stable.

Governments used to do this, or at least try to, but over time corruption sets in and they all abandon it to their eventual economic ruin.

If this still doesn't help, then do a Google. I don't doubt there are some explanations that may help you.

[Jason_Els]

The Current Situation

What has happened is that many home owners saw the value of their homes double, then treble, then quadruple (in some areas), and then took out second mortgages or home equity loans. Some owners used that money to upgrade to a more expensive home, others spent the money on improving their homes, but quite a few just used the money to buy bling.

In two years the baby boomers will begin retiring and likely downsize their homes. Property taxes have soared in the very areas that saw the biggest growth rates through the latest housing boom and most retirees can't afford or do not want to pay the ever-increasing property tax rates on their homes. These retirees will look for condos or small homes in retiree-friendly states but who will buy the homes they need to sell?

There are far fewer GenX/GenY buyers than there will be boomer sellers. Further, over half the household wealth in the country still belongs in boomer hands. Yes they may be able to help out their kids to buy a house, but they also have the government whacking their wealth with capital gains, estate, and gift transfer taxes. They won't be able to give their kids much of a help. There won't be much, if any, tax relief either. As the boomers retire they're going to come calling for all those IOUs in the (laughably named) Social Security trust fund and all those Medicare benefits.

The middle class in the United States is shrinking as the wealth divide increases. The past 30 years have seen high-paying manufacturing jobs go abroad and now many professional service jobs, particularly in IT, going abroad as well. Employment may be high, but job earnings aren't keeping pace with true inflation and certainly not with the soaring housing values. In short, the relatively young middle class now cannot afford a house comparable to one they grew-up in. Even with two incomes they're reaching for any kind of mortgage they can get for the house they think they should be able to afford. This doesn't bother most buyers though because not only will the government give them tax breaks for buying a home and the Federal Reserve has dropped interest rates to nearly zero, but the buyers have grown-up in an environment where housing prices have only gone up. To them, a house is a safe investment. There will always be someone who wants to buy their house for at least what they paid.

To stimulate investment following 9/11, the Federal Reserve dropped interest rates to nearly nothing and began flooding the US economy with cash to keep it afloat. They did this by making interest rates drop to next to nothing, making money as cheap as possible to get. Nobody was making money in those assets whose value is measured against interest rates (think of bonds and savings accounts). An investor getting 2% in their savings account wouldn't be making enough in interest to pay for the gas to get to the bank! So money had to go somewhere. 9/11 saw a stock dip but soon money began pouring into the stock market because it literally had nowhere else to go short of under the mattress. That flood of liquidity did very well for the stock market; the proverbial rising tide that lifted all boats. As the stock market recovered, something else happened. Many people, post 9/11, wanted to get out of cities and those who decided to stay in cities decided to buy. After a major disaster, and in subsequent unstable times, people tend to hunker down; gathering their family, increasing the size of the family, and securing assets. This mentality, combined with the low interest rates, the willing Mae sister lenders, and the increased cash people had, made them look for a, "safe," asset. That asset was real estate.

People who had houses saw the value of their house increase. If they had an older mortgage, they refinanced to a lower rate. Buyers just entering the market felt they had to act now to get in on the real estate boom. Many saw the increase in the value of their homes and decided to make their homes more valuable still by adding-on or remodeling. Others bought second homes. Now when that happened, plenty of people saw their, "net worth," soar. Suddenly people were worth far more money than they ever were because the cheap Fed money helped them buy an asset whose value kept going up and up and, at least on paper, people were worth more since they owned more. So what did people do?

They spent it! They bought bling, they bought second houses, they even sold their previous house and bought even more expensive McMansions! So long as interest rates were low, they could afford payments on a nicer house. It was a good investment, in their eyes, because the newer, more expensive house kept going up in value too. And they started using their home equity credit for vacations and luxury items like expensive cars, boats, and designer clothes. Prices of things seemed to be rising a bit but given the feeling of newfound prosperity, it didn't matter much.

Things, you may notice, which don't appreciate in value.

What did it matter? The stock market was doing great, housing values were going up, and people were feeling positive about the economy. The matter is that the wonderful flood of Fed money which people loved when it was a bunch of tasty waves on their favorite surfing beach, eventually turns into a tsunami of money. Once the stock and housing markets were saturated, there was only one place left for the money to go. Where it has always gone after stocks and real estate markets become saturated in a mass inflationary cycle: commodities. Oil, cotton, nickel, copper, aluminum, and yes, the quintessential orange juice and pork bellies. Saavy investors saw that stocks were overpriced, housing was overpriced, what was left? The long, long, neglected commodity markets. Money poured into commodities and, as a result, the prices of commodities soared too. Most people saw curious stories about the penny and the nickel now being worth more than their face value but they didn't worry about it. Why does it matter? Well, to make OR consume things, you need commodities. Even if the US is now primarily a financial service economy, we still need cars and orange juice and bacon and cotton. When the costs of those materials rise, the manufacturers pass those costs on to you, the consumer. This is what most people consider to be inflation and of course it isn't.

The inflation started waay back when the Fed started dumping money onto the US people to keep the economy going. They started printing as much money as possible, getting other countries to lend us the money to do it (hence the soaring budget deficit).

First we get all that new, cheap money. Yaay! We can afford nice stuff!

Second we buy stuff with it. Real estate and stocks! Since nearly everyone is feeding at the cheap money trough, the rising tide kicks in and everything seems to go up! Yaay! We can afford even nicer stuff!

Third, all that money we're spending ends-up in the pockets of manufacturers and financeers who like to buy that which is undervalued. They want to buy assets when they're cheap, not when they're hot. As they have always before, that money went into commodities. Manufacturing costs increase, prices rise, wage earners want raises, pensioners want increases in benefits, and the government has to raise money (via taxes) since it too has pay for what it buys and things aren't getting any cheaper. But now interest rates are higher. Prices are going up, adjustable rate mortgages are going up, only this time there is no source of nearly free money. Like drug addicts seeking a fix, our dealer has raised prices after we got hooked and we have to scrape to afford our McMansions and BMWs. Worse, those assets we borrowed against, the houses, are either in static value or declining. Many people are paying mortgages on a house that now costs less than they paid. Certainly the housing boom didn't hit everywhere and some places may be seeing an upswing, but those markets are relatively small compared to the general trend and so won't have much effect on the market as a whole.

This time we have a demographic and economic crisis helping the housing crash along. Some banks got risky but others were more sober. Those are the banks that will make money on the way up AND the way down. Remember, Trading Places? Remember Mortimer and Randolph Duke explaining commodities to Billy Ray? "The good part is that no matter whether our clients make money or lose money, Duke & Duke get the commissions."

Guess who's getting Duked now?

Hint: It ain't the important banks. No, they invested in the smaller riskier banks so that they'd be there to make the money but be able to be protected when the risky banks collapsed.

Now.... you may wonder..... what happens next? Well, talk to your grandparents and elderly relatives. Ask them what happened in '29 and what was happening then with their real estate boom. Our crash likely won't be nearly so spectacular. We now have plunge protection teams scurrying like crazy to support the markets and a much more intricate world economy. Rather than end in a bang, it may likely end like a balloon deflating. Quickly but steadily deflating across the board. History tells us that the stock market tanks as people sell assets to cover their housing payments and increased cost of living, then the real estate market falters. It doesn't all drop in one day. 1929 didn't happen all at once. The market was very volatile with little clarity for some time. There was an informal plunge protection team in place but it was composed of men of robber baron wealth trying to prop-up the markets. Today we don't need the Morgans and the Rockefellers to do that, we have the government. The marginal lenders start to sink, defaults increase, but there are also surges of confidence as those who've made a lot of money try to keep the market going. Some reports say everything is great, others say it's all doom.

Stop for a second and consider a fact of human nature. The majority never see a crash coming when it happens. If they had, there wouldn't have been a crash in the first place. To have a crash you have to have a large number of people, a lot of experts, saying that everything's great and there's no reason to worry. A crash means that a vast number of people got caught with their pants down. People whom, until the day before, would swear on their children that there were no problems, there were not going to be any problems, and they've backed that opinion with their money. They believe they've outsmarted economic markets. They believe we're smarter, more technological, have better supports. It doesn't matter. The mantra is always the same, "This time it's different."

As real estate and the stock markets begin to deflate, the commodities continue to go up. Rather than paper, people who still have money to invest will want to own tangible goods, not paper. They will move money to super-cap stocks like Coca-Cola, GE, Walmart, etc. They will buy utility stocks. They will buy blue chip stocks in countries that traditionally have a great economy when the US does not (like Austria). Not all those companies will necessarily survive unscathed, but at least some of them declare dividends and while the value of the company may tank at least your cash is bringing in something when most people are losing money. Smart money are already moving to foreign real estate and blue chip assets, riding the world-wide real estate boom that the US started but the downside of which has yet to effect far away places. They're moving money to precious metals too because they know that when all the money we've flooded the world with comes back to the US, the value of the dollar will plummet and precious metals serve as a way to hold the value of the money you have.

What's the best you can do? Well, first, try to own as much of your primary home as possible. We all need a place to live. Don't see it as an investment, see it as a necessity. If you have to move or need to sell to make ends meet, then sell your house now and rent for a while. Take the money you've saved and put it in blue chips that pay dividends, put it in TIPS, and if you have the cast iron stomach for commodities (i.e. you don't mind seeing your investments rise or drop up to 25% in a day), then put at least 10-25% in precious metals-based securities. You may lose some money, but you won't lose as much as most people and, most importantly, you should weather things well until everything restabilizes.

[Jason_Els]

China

China is, or was, the largest buyer of our debt (Japan is second). We sell them a bond, they give us money for the bond, we promise to pay them back the money they've leant to us plus interest. Just like a bank loan.

We're selling them IOUs. So long as they, or anyone else, buys them, then it's as good as US dollars in the bank. Their bank. Not ours. We spend the money they give us.

Why do they want US dollars? Well, the Chinese can't really pay for anything with their currency. Their currency isn't what is called, hard currency. Sure it's useful for purchasing things within China, but unlike nearly every other currency, China doesn't allow their currency to fluctuate in value based upon open market trading. As a result, their currency doesn't represent the value of their economy.

China's economy is very hot and, as a result, the value of their currency should be very high but it isn't because the Chinese government sets the exchange rate. If it was very high, things from China would suddenly become more expensive to everyone else in the world who buys goods from China. China's economy would cool down rapidly and trade would become easier to balance. As it is now, the United States is at a disadvantage because our currency floats while China's doesn't. That means US goods sold in China artificially cost more than they should and Chinese goods sold in the US aritifically cost less than they should.

Now that China has stopped buying US bonds, we have to find a buyer for those bonds. How can we do that? Well we can ask other countries to buy them, but if the dollar's value keeps going down, then there's no point in buying them. Oh sure other countries will still buy a few bonds because they need to, but they won't buy nearly as many as we need to keep our government fed. The other way we can entice buyers is to raise the interest rate being paid on the bonds so we give the bond owners more money when the bond becomes due.

How much do we have to raise the interest rate? As pointed out, likely 2 percentage points. China's massive buying of our bonds has offset the market value of the bonds.

Why does that matter? The interest rate we pay on those bonds is linked to the interest rates the Federal Reserve sets. That means that all those people out there with mortgages should see their adjustable rate mortgages rise by 2 percentage points. That's a BIG deal. It also means that money here in the US becomes more expensive for everyone to borrow. Credit card interest rates go up too. The effect is that our economy slows, nearly guaranteeing a recession.

The good news is that as the value of the dollar drops, US goods become less expensive abroad... except in China because, as before, they don't let their currency float. This is offset though by the fact that goods the US imports from everywhere else become more expensive.

In the larger scheme of things it also means that the rest of the world will see China's action and be tempted to follow suit.

• The more countries decrease or cease buying our bonds, then the higher we have to raise interest rates to make them attractive again.
• To pay for running our government we have to attract foreign money.
• To pay for attracting foreign money we have to pay them more than they leant us.
• To pay more than they leant us, we have to raise the interest we pay to them.
• The more we raise interest rates, the slower the economy becomes because investment money becomes more expensive.
• The more money becomes more expensive, the more Americans pay in interest rates, particularly on mortgages, loans, and credit cards.
• The more Americans pay out of their pockets, the less they can spend and so the American economy drops even further.
• The more the American economy drops, the less valuable our money becomes and that makes it more difficult to attract foreign money.
• Go back to step 1.

Questions & Answers

1) Do foreign countries holding our debt have the right to cash it in at any time?

If you mean can they go back to the Treasury and demand back the full face value of the financial instruments they have purchased, then no. As with any other bond, the US is not obligated to pay back the bond until it expires. If you buy a 10 year bond then the US does not have to pay back the money you paid for it until those 10 years are over. The holder of the bond, let's assume the original purchaser, can however, sell the bond to someone else at any time. The original (or any subsequent) purchaser can sell the bond for more or less than what was originally paid for it. Whomever ends-up with the bond at the end of its life is who gets the original investment back from the Treasury.

2) Are these debt instruments called Treasuries, Bonds, or Securities? Are these terms interchangeable, and if not, what's the difference?

For this, I defer to Wikipedia which actually has a very good answer. Per the same:

Treasury securities are government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. They are the debt financing instruments of the U.S. Federal government, and are often referred to simply as Treasuries. There are four types of treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Savings bonds. All of the Treasury securities (besides savings bonds) are very liquid and are heavily traded on the secondary market. -Wikipedia

Further down in that same link, is a good explanation of the difference between the various types of Treasuries. The one everyone pays attention to is the 10-year T-notes because they're the ones which are linked to mortgage interest rates.

Because mortgages are tied to the 10-year bond, there is considerable pressure on the Federal Reserve not to raise interest rates to make the 10-year bond more attractive to investors. Should they raise interest rates? Traditional economic theory would say, 'yes of course.' Political economic theory would say, 'do you want to send even more marginal mortgage borrowers with variable interest rate loans into default and ruin the financial institutions who leant the money?' To finance our debt, the 10-year T-bill is essential. If we don't support it and make its return more attractive than shorter term securities, then fewer and fewer nations will want to buy the bonds. This is why we're damned if interest rates go up and damned if they don't.

3) My understanding is that the Federal Reserve will buy higher interest bonds sold on the bond market and issue lower interest bonds in their stead when bonds are dumped on the bond market. They issue higher interest bonds when the bond market falters, as well as issue new bonds to cover the government's debt. Is this correct?

Essentially yes, but remember that all they're doing is robbing Peter to pay Paul. This is very much a juggling act. To raise something up they have to let something drop down and to prevent that something from dropping down too far they have to raise it back up, but at the expense of something else; usually what they just resupported before. As before, when they offer higher interest rates to support faltering bonds, it translates into higher interest rates for the American consumers and higher interest payments we have to fund in tax revenue.

4) I saw where you had posted the US was now 66 trillion dollars in debt. Where did this figure come from?

That figure comes from a report issued in 2003 by Wharton professor Kent Smetters and Jagadeesh Gokhale, the economist at the Cleveland Federal Reserve Bank:

Their report, Fiscal and Generational Imbalances: New Budget Measures for New Priorities, estimates that the “fiscal imbalance” – existing debt plus future projected deficits – is an enormous $45.47 trillion, expressed in 2003 dollars. That dwarfs the $3.8 trillion debt that the government officially reports. If steps are not taken immediately to correct the imbalance, it will rise to $53.96 trillion by 2008, the report says. -Fiscal and generational imbalances: new budget measures for new budget priorities

Essentially what they're talking about is not only all the debt we've issued, but all the unfunded obligations- programs the government has pledged to fund in the future including Social Security and Medicaid/Medicare- which the government does not now include in its figures.

If you were an accountant at a private accounting firm or a public corporation, you'd be stripped of your license and thrown in jail for practicing accounting the way the government does. Being the government, they can do what they want. The Comptroller General of the United States, David Walker, agrees. Mr. Walker has taken his show on the road to try and get the United States to wake-up.

I highly urge everyone reading this to take a few minutes to view the following link. If you think I'm a crackpot then listen to the Comptroller General of the United States. As he's not elected, he can get away with saying what he does. -CBS Interview with David Walker

5) How much of this debt iis held by foreign countries, and where can I find a breakdown of how much each of these countries holds?

Your friends at the U.S. Treasury are happy to oblige. See Major Foreign Holders of Treasury Securities, as published by the Department of the Treasury.

6) I understand (kind of) that dollars are the medium of exchange on the New York and London Oil Bourses. Are these the only commodities markets that deal only in US dollars?

If you are asking, is oil the only commodity only sold in U.S. dollars then the answer is (for now) yes.

7) How would the Federal Reserve react to massive (trillions) of dollars in bonds being dumped on the bond market with no buyers?

In theory, they'd have to spike interest rates, which is pretty much what they did during the 70s and early 80s to counter stagflation. The higher the return on an investment is, the more money will flow toward that investment. It's the only weapon the Federal Reserve has short of buying back all the bonds to keep the price stable but that would ruin the member banks of the Federal Reserve and the US along with it.

Interesting point. Who are the member banks of the Federal Reserve? As a private organization, the Federal Reserve is composed of private banks. Here they are:

• Rothschild Banks of London and Berlin
• Lazard Brothers Bank of Paris
• Israel Moses Sieff Banks of Italy
• Warburg Bank of Hamburg and Amsterdam
• Lehman Brothers Bank of New York
• Kuhn Loeb Bank of New York
• Chase Manhattan Bank of New York [Now JP Morgan Chase]
• Goldman Sachs Bank of New York

These are the banks that run the US monetary system. (Source: 'T' Minus Ten by Ed Steer for Le Metropole Cafe.)

If that list makes you wonder then you'll be thrilled to know that even they aren't the true powers behind the throne. The Federal Reserve and its sister bodies in all other foreign nations have to answer to the capo di tutti capi of reserve banks and that's the Bank of International Settlements (BIS)out of Basel, Switzerland. Our Federal Reserve Chairman, Ben Bernanke, serves on the board of directors of the BIS. The BIS is another product of the aftermath of World War I and it is no odd conincidence that its establishment coincides with the establishment of the Federal Reserve here in the US. If you want to see who are the public directors and managers of the BIS, just look here. They have nothing to hide, perhaps because they have nothing to fear.

If you'd like a more detailed view, check out The Bank for International Settlements: Evolution and Evaluation by James C. Baker.

The BIS was formed with funding by the central banks of six nations, Belgium, France, Germany, Italy, Japan, and the United Kingdom. In addition, three private international banks from the United States also assisted in financing the establishment of the BIS."

Each nation's central bank subscribed to 16,000 shares. The U.S. central bank, the Federal Reserve, did not join the BIS, but the three U.S. banks that participated got 16,000 shares each. Thus, U.S. representation at the BIS was three times that of any other nation. Who were these private banks? Not surprisingly, they were J.P. Morgan & Company [Now known as JP Morgan Chase], First National Bank of New York [Now known as Citigroup]and First National Bank of Chicago [was Bank One but was bought out in 2004 by JP Morgan Chase]. -ibid.

8) I understand that the stock markets here in the US would suspend trading if they became too unstable, in order to provide a 'cooling off' period to keep them from falling through the floor. What other techniques are available to the Plunge Protection Teams (PPT)? Are there Plunge Protection Teams in place for the Bond Market as well?

We don't know. Officially the PPT doesn't exist and there was no official acknowledgement of it until President Clinton's former aide, George Stephanopoulos accidentally spilled the beans on David Letterman's TV show. The most I can suggest to check Wikipedia's references for the latest theories.

[ParkTwain]

Jason wrote:


"Keep in mind I'm an Austrian economist at heart as libertarians usually are."
Libertarianism is not a practical political philosophy. It looks good up on the shelf but can't work in the real world. (Sort of like Ayn Rand's objectivism philosophy.) Besides, the smaller the government, the more likely that the very large private aggregations of capital out there in the world will exert unacceptable economic power within the economy.

"Inflation is printing (or these days pressing a button on a computer) more money than your economy can back."
Not a definition that is accepted by any mainstream economist. If you redefine the key terms of your argument, your argument becomes suspect.

"Well, we could raise taxes to European amounts, stifling economic development, reducing the standard of living, and gutting our military."
"Gutting" the U.S. military's budget is right-wing speak. Who are our present enemies? Some guys in caves in NW Pakistan. This means we need a military budget of some mulitple of the 1989 budget at the time the Cold War ended? This is ludicrous and reduces your credibility in the discussion. Selected tax increases on the very rich (>$200K income per year) would go far to reduce the annual deficit. Reducing the military budget would produce the biggest economic benefits due to redirecting private capital into enterprises that are economically productive.

You also don't seem to speak in terms of national debt as a percentage of GDP. Check out those figures for the industrialized nations of the world.

Your sketchy grasp of basic economics leads me to skepticism of the rest of your long post. Maybe I'll get back to it later.

[Jason_Els]

Originally Posted by ParkTwain

Jason wrote:


"Keep in mind I'm an Austrian economist at heart as libertarians usually are."
Libertarianism is not a practical political philosophy. It looks good up on the shelf but can't work in the real world. (Sort of like Ayn Rand's objectivism philosophy.) Besides, the smaller the government, the more likely that the very large private aggregations of capital out there in the world will exert unacceptable economic power within the economy.

Leaving aside how practical you believe libertarianism is, the largest aggregations of private capital are held in the countries with the largest per capita government spending. I don't know what you consider, "unacceptable economic power," either. It sounds like you think government should strip wealth from any private citizen or corporation that becomes wealthier than the government thinks it should be.

"Inflation is printing (or these days pressing a button on a computer) more money than your economy can back."
Not a definition that is accepted by any mainstream economist. If you redefine the key terms of your argument, your argument becomes suspect.

I could have said, "Inflation is the increase in money supply without proportional backing by specie," but I'm trying to keep it simple.

"Well, we could raise taxes to European amounts, stifling economic development, reducing the standard of living, and gutting our military."
"Gutting" the U.S. military's budget is right-wing speak. Who are our present enemies? Some guys in caves in NW Pakistan. This means we need a military budget of some mulitple of the 1989 budget at the time the Cold War ended? This is ludicrous and reduces your credibility in the discussion. Selected tax increases on the very rich (>$200K income per year) would go far to reduce the annual deficit. Reducing the military budget would produce the biggest economic benefits due to redirecting private capital into enterprises that are economically productive.

"Right-wing speak?" You're attributing to me an ideology I do not necessarily espouse. It's merely offered as one of several alternatives.

You also don't seem to speak in terms of national debt as a percentage of GDP. Check out those figures for the industrialized nations of the world. Your sketchy grasp of basic economics leads me to skepticism of the rest of your long post. Maybe I'll get back to it later.

When you read more you'll see what I'm talking about. Our GDP isn't going to pull us out of this hole. I also agree we're not the only nation doing this to ourselves.

As to the last two sentences, I could say the same, but it appears we're approaching this from two separate economic philosophies.

[ParkTwain]

Do you believe that there is a basis in economic reality behind the Sherman Antitrust Act?

Do you believe that present-day European economies exhibit "stifled" economic development? On what basis?

By your saying, "I could have said, 'Inflation is the increase in money supply without proportional backing by specie,' but I'm trying to keep it simple," you haven't changed your original definition. Each presumes that a specie-backed quantity theory of money holds sway, when that particular version of the theory has basically gone the way of the Bretton Woods system, which formally ceased functioning starting in 1971.

Your use of the word "gutting" is pejorative. It indicates that you approve of the present level of U.S. defense spending, which is a staple of today's U.S. right wing ideologies. I did not yet find where you describe the basis for this view.

Jason wrote:
//
In a perfect economic system, a government should only print enough money to reflect the value of its economy (or gold holdings). As the economy grows, so can grow the money supply because there would be no inflationary effects. But if the economy contracts, then the government should withdraw money from the system to prevent inflation. By doing that, the value of the currency remains constant and so the economy remains stable.

Governments used to do this, or at least try to, but over time corruption sets in and they all abandon it to their eventual economic ruin.
//

By normal and conventional banking practices, banks (whether federally chartered or not) make loans and thereby literally create money. You don't seem to recognize this as an actual activity in the economy. The government doesn't literally "print money." To say so is to repeat a fairy tale for grade school children. You also seem not to appreciate the real-world difficulties for the Fed or any other public or private agency to accurately measure the monetary needs of the economy at any point in time. Which definition of "money" do you use (M1, M2, M3, etc.)?

Jason wrote:
"To stimulate investment following 9/11, the Federal Reserve dropped interest rates to nearly nothing and began flooding the US economy with cash to keep it afloat."

I don't think that this statement is factual. It also doesn't mention the growing influence of the disinflationary effect of the massive importing of low-priced goods manufactured in China, which has resulted in contraction of some U.S. production (i.e., off-shoring of U.S. production facilities and jobs) and has steadily overpowered the pricing power of producers in the U.S., Japan, and the rest of the world. The economic effect of the growth of China's exports is to drive prices lower, independently of any open-market activities by the Federal Reserve. This downward pressure on prices has been increasingly affecting the U.S. economy and was part of the reason that the Fed during the last years of Greenspan's tenure chose to reduce interest rates over several years. I believe that it was primarily the influence of low-priced Chinese imports on the U.S. economy that led the Fed to steadily lower interest rates earlier in this decade, and thereby make home mortgages, and all debt, that much more attractive all across the economy. Compare the resulting historically low Fed funds rates earlier in this decade to the rate of change in GDP (and also very low inflation rate) from year to year since then. There wasn't much positive impact on GDP growth (and inflation has remained very low, 1% to 3%) until very recently, which is telling us that there has been another suppressant in effect on U.S. economic growth.

[commancer]

China is, or was, the largest buyer of our debt (Japan is second).

Maybe a quick check of the facts might cause you to confine yourself to your home in sophomore economics class instead of gracing the public with your thoughts?

http://www.data360.org/graph_group.a...h_Group_Id=609

The biggest buyers of US debt are Americans, always have been Americans, and probably always will be Americans....BY FAR.

China and Japan together, might, just barely own a trillion dollars of US debt, which is small compared to the 6 or 7 trillion owned by Americans, and hardly the "trillions" rolling around out there like you suggest.

But why bother with facts when sharing your own simpleton views is so much more fun?

BTW, US public debt is no bigger than its major European allies and is SMALLER than Japan's, in terms of percentage of GDP.

[commancer]

www.msnbc.msn.com/id/17424874/

...another link, with some good economics 101 information sorely needed in this thread, explaining who owns the national debt of America (hint: no "trillions" floating around in China or Japan)

[Jason_Els]

Wow. Such arrogant rudeness! Struck a chord I guess. I knew there'd be controversy over this because it's not a popular view, but there you are.

Quite right, I should have stated,"the largest foreign holder of our debt." I stand corrected.

Trillions, however, is correct and those aren't my numbers, but the numbers of the Federal Reserve and the Comptroller General of the United States. If you don't like the numbers, complain to them.

[saganista]

Neither the Fed nor GAO (which is what Comptroller General David Walker heads) has anything to do with public debt. This is entirely the realm of The Bureau of the Public Debt at the Treasury Department.