Financial Crisis

[Chaimai]

Just did very nicely on RBS, in at 23p out at 44p, my next two Thailand trips paid for, thank you Sir Fred.

I am totally mystified. What is the point of this post. If Sir Fred is a member here couldnt you have simply sent him a PM?

One point about this post is that there are opportunities out there. Banks, for example, fell too far and thereby enabled bartender to buy at 23p and take his profit at 44p (47p today).

Slightly less exciting but I was able to buy a container of rice yesterday for GBP 600 less than a couple of months ago - that covers another flight as well

Well done 'bartender' a great message to those who are sitting on there <deleted> just reading doom and gloom material and waiting for the implosion.

[flying]

Dunno about the other two, but the dollar is not being devalued in any real way yet.

How about rising food prices

Edited May 8, 2009 by flying

[Naam]

Just did very nicely on RBS, in at 23p out at 44p, my next two Thailand trips paid for, thank you Sir Fred.

I am totally mystified. What is the point of this post. If Sir Fred is a member here couldnt you have simply sent him a PM?

One point about this post is that there are opportunities out there. Banks, for example, fell too far and thereby enabled bartender to buy at 23p and take his profit at 44p (47p today).

Slightly less exciting but I was able to buy a container of rice yesterday for GBP 600 less than a couple of months ago - that covers another flight as well

Well done 'bartender' a great message to those who are sitting on there <deleted> just reading doom and gloom material and waiting for the implosion.

i don't think "Sir Fred" is a TV-member. he is the former CEO of RBS and nearly ran RBS into the ground. why "Bartender" thanked him for his profit is unknown to me.

nicely depicted Chaimai!

[Chaimai]

i don't think "Sir Fred" is a TV-member. he is the former CEO of RBS and nearly ran RBS into the ground. why "Bartender" thanked him for his profit is unknown to me.

I believe that the gratitude to "Sir Fred" was for his mis-management of the business that resulted in the share price getting hammered - thus creating the buy opportunity.

[flying]

I had to laugh

Edited May 9, 2009 by flying

[12DrinkMore]

The EUR, USD and GBP are being devalued every day now. The printing presses are running...

Everybody looks at that half of the picture. And yet it remains the case that you can by more house, more stocks or more commodities using those USD than you could a year ago. Dunno about the other two, but the dollar is not being devalued in any real way yet.

Every time Bernanke prints a few more billion USDs by buying bonds with newly issued paper, every USD in existence loses value. Although asset prices that you mentioned are falling, and this is EXACTLY what Bernanke is trying to reverse, inflation in stuff people buy every day to live on is not coming down. The CPI is a manipulated lie, take a look at http://www.shadowstats.com/, due to the government switching around the goods in the basket, they have managed to keep the CPI 3% lower than the pre-Clinton statistics would show. There are obvious reasons for this fraud, as pension, salary and benefit rises are all related to the CPI. But if the original mix had been used, in could be argues that the interest rates would not have been so low and the house price bubble would not have been so great.

Maybe I should have used "debased" rather than "devalue" in the post.

[12DrinkMore]

I believe that the gratitude to "Sir Fred" was for his mis-management of the business that resulted in the share price getting hammered - thus creating the buy opportunity.

This criminal has slipped under the radar recently, after the big fuss over his 800,000 Quid/year pension, payable NOW at the age of just over 50. Unbelievable, based on his performance anybody else would have been in the dole queue on 70 Quid/week. He gets this amount every hour, every day inflation proofed for the rest of his (hopefully short) life, at the taxpayers expense. AMAZING LABOUR!

[flying]

Every time Bernanke prints a few more billion USDs by buying bonds with newly issued paper, every USD in existence loses value.

I do not know why but many folks I speak to have no idea about this.

They do not realize that when they print $$$ they have taken some of the dollars from those who previously had them & are giving them to someone else.

Yet many of these same folks understand that if their stock splits they get an increase in the shares they own. I wonder how they would feel if their stock split & only some folks got the newly released shares?

[12DrinkMore]

Just did very nicely on RBS, in at 23p out at 44p, my next two Thailand trips paid for, thank you Sir Fred.

http://www.independent.co.uk/news/business...nt-1681874.html

There is little evidence that Britain's ailing economy is stabilising, let alone recovering, warned Stephen Hester, the chief executive of Royal Bank of Scotland, as he revealed yesterday that the bank had lost £857m in the first three months of the year.

The performance, which followed a loss of £24.2bn in 2008, the biggest deficit in British corporate history, reflected a massive rise in charges for bad debts, up from £656m last year to £2.86bn, as well as £2.1bn worth of further writedowns on RBS's credit assets.

Maybe not a good time to jump in again?

Fred certainly left the bank in a big mess.

[cocopops]

The CPI is a manipulated lie, take a look at http://www.shadowstats.com/, due to the government switching around the goods...

Well, maybe. On the other hand, the single biggest component of CPI is housing. And the government has that at 1.4% up from march last year, which seems a bit high. "Owners Equivalent Rent" is up 2.1% over the same period. Make of that what you will.

Expanding the balance sheet of the Federal Reserve - printing dollars - could devalue the dollar, all other things being considered equal. But all other things are not equal. It is not at all clear when, or even if, this printing will turn into the kind of inflation some folks think it might.

[Abrak]

Ok....... I see

But if I were using random dates like 1980 I would opt for 2000 instead

Actually the only reason I used Oct08 is because as you prob know....that is when I jumped in. I am also the first to admit it was sheer coincidence/luck & not any techno timing/reading...crystal gazing etc etc etc,,,,,,,As I hold none of those talents

i am well aware when you jumped in. but i answered Abrak and the focus was on Dollar and the potential idiots who hold Dollars.

quoting Abrak: "how can you really justify holding dollars. If the dollar goes up you have to conclude that most investors are stupid or the Fed Chairman is a fraud and if it goes down and you still hold it you will simply feel an idiot."

I think I get your point - which may or may not be that you shouldnt judge investments decisions solely on the basis of the absolute returns on them. For instance, I swapped by dollars into sterling at 1.3756 which was almost exactly at the bottom but at the end of the day all I did was swap from one pile of crap into another. The fact that, at this moment in time, it looks like I am sitting on a profit doesnt make me smart, simply lucky. (Incidentally I happen to choose this particular example where I got lucky not because I am generally lucky in investing, merely that it is more pleasant writing about a lucky investment than writing about an unlucky one or one where I was simply stupid (these are placed in a little box at the back of brain in the vain hope that I will totally forget about them.)

I think this might happen one day - afterall wasnt it Gordon Brown who sold half the UK's gold reserves at an average price of US$275 - and who is now considered a financial guru for bailing out banks who lent far too much at the top of the housing boom and for giving creditability to the term 'quantative easing'. I suspect Gordon Brown thinks he was unbelievably unlucky in calling the bottom of the gold price so accurately but if you are going to swap gold into cash and then support 'printing money' as an economic policy, I hope he at least he realizes that his reputation as a financial guru is based on miraculous luck rather than brilliance.

Except for the occasional TV member, I think we can all admit that we have made the occasional stupid investment in our lives but hopefully we learn from it and move on. What we dont do is whinge about them. I find the Chinese who thought it was wise to lend US$1tr to the country that owned the printing presses, should simply admit that it wasnt a very smart idea if it goes wrong rather than whinge about US monetary policy and then threaten to stop buying USTs. Afterall it isnt even obvious they have any money given that the monthly C/A surplus as shrunk fromm US$40bn to US$5bn and they have announced a US$600bn fiscal stimulus (dont they tend to take the idea of competing with the US too far?) so they cany even support their ow support their own 'bull squeeze'. Still they will at least make that tired cliche 'a bull in a China shop' a little more witty.

[Abrak]

The CPI is a manipulated lie, take a look at http://www.shadowstats.com/, due to the government switching around the goods...

Well, maybe. On the other hand, the single biggest component of CPI is housing. And the government has that at 1.4% up from march last year, which seems a bit high. "Owners Equivalent Rent" is up 2.1% over the same period. Make of that what you will.

Expanding the balance sheet of the Federal Reserve - printing dollars - could devalue the dollar, all other things being considered equal. But all other things are not equal. It is not at all clear when, or even if, this printing will turn into the kind of inflation some folks think it might.

Bernanke is not an idiot. He has stated in the past that by deliberatimg printing money it may not result in a devaluation of the dollar (even if under normal circumstances you would expect this). He categorically states however that if printing new money does not devalue the dollar its devaluation can be virtually guaranteed by using unlimited amounts of newly created money at virtually zero cost to buy foreign assets. As the stock of foreign assets in the world is so large relative to US money supply it is inconceivable that such a policy if inacted efficiently would not devalue the dollar.

I regard this policy statement as virtually axiomatic - I simply dont see how anything else could happen so long as you were prepared to continue to buy foreign assets at zero cost. Any other out come would be absurd. The US would buy the entire world for nothing!!?? (if you consider this vaguely possible and can be convincing about - Zimbabwe needs you (although given this view I believe you should accept the job in local currency.)

This why I dont get Krugman's view (who Bernanke recruited to Princeton). He is clearly about the brightest economist around (so in no way can I claim any right to disagree with him), he also explains his theories in a manner that even I should be able to understand - I still dont get his argument though that deflation in the US maybe almost impossible to avoid.

[Chaimai]

Just did very nicely on RBS, in at 23p out at 44p, my next two Thailand trips paid for, thank you Sir Fred.

http://www.independent.co.uk/news/business...nt-1681874.html

There is little evidence that Britain's ailing economy is stabilising, let alone recovering, warned Stephen Hester, the chief executive of Royal Bank of Scotland, as he revealed yesterday that the bank had lost £857m in the first three months of the year.

The performance, which followed a loss of £24.2bn in 2008, the biggest deficit in British corporate history, reflected a massive rise in charges for bad debts, up from £656m last year to £2.86bn, as well as £2.1bn worth of further writedowns on RBS's credit assets.

Maybe not a good time to jump in again?

Fred certainly left the bank in a big mess.

12D - You conveniently ommited the following part of the reports:-

Royal Bank of Scotland (LSE: RBS.L - news) powered forward this morning despite sliding into a first quarter loss of £44m with its profit and loss statement again wrecked by write-offs, despite this the share price was up to 47.40p +13.94%

Edited May 9, 2009 by Chaimai

[Naam]

1. Except for the occasional TV member, I think we can all admit that we have made the occasional stupid investment in our lives but hopefully we learn from it and move on. What we dont do is whinge about them.

2. I find the Chinese who thought it was wise to lend US$1tr to the country that owned the printing presses, should simply admit that it wasnt a very smart idea if it goes wrong rather than whinge about US monetary policy and then threaten to stop buying USTs.

1. that goes without saying. but even if we have learned to avoid those mistakes we made we will still make new mistakes over and over again. however, the one and only thing that counts is the bottom line! reading Thaivisa i realise each and every day that the majority of members are committing the biggest mistakes an investor can make. instead of being flexible they are stubborn. instead of looking at a variety of currencies they only know their "home" currency and wait that goddess Fortuna lifts the exchange rate of the currency in which they derive their income or dream about skyrocketing value of their gold holdings. last not least... instead of informing/educating themselves what possibilities exist to overcome or avoid losses and achieve decent returns they are wasting their time discussing the 150 Baht ATM fee.

2. i [not so] humbly beg to differ Abrak. China had and has no other choice than to invest the trade surplus with the U.S. in US-Dollars. the bitching we hear from various sides and threats to switch from USD is a wet dream of some lower ranking politicians and economists. those who are in charge know that they are riding a tiger and that it is definitely safer on the back of a tiger than jumping off.

[midas]

2. i [not so] humbly beg to differ Abrak. China had and has no other choice than to invest the trade surplus with the U.S. in US-Dollars. the bitching we hear from various sides and threats to switch from USD is a wet dream of some lower ranking politicians and economists. those who are in charge know that they are riding a tiger and that it is definitely safer on the back of a tiger than jumping off.

Quite amazing how Naam equates important issues to having " wet dreams "

1. None of the USA States will ever secede a because it's just a wet dream of the various Governors-according to Naam

2. And now another wet dream theory-

China may not " switch from USD " quickly-

but there is plenty of new evidence China is preparing to reduce its exposure to USA assets.

[Abrak]

Well I agree with Naam in one respect - China only made its wealth by pegging its currency at an undervalued rate against the US dollar so should we really be concerned about what will effectively be the largest foreign debt default in Global Economics.

I think the whole argument about the manipulation of the CPI numbers is fascinating. Bernanke's theory as opposed to his Doctrine is that the deflation in Japan was caused by an inability to create inflationary expectations. While the deflationists appear to be right at the moment you cant get away from the simple fact that the best cure for a debt problem is inflation. Bernanke has tallked about 3-4% inflation targets under zero interest regimes but readily admits that this could lead to hyper-inflation. He just considers this more preferable than deflation which he is as ultra-destructive.

If his goal is to create inflationary expectations he clearly has an interest in inflating the CPI as opposed to the last 20 years when CPI numbers were artificially depressed. The idea of course apart from devaluing debt is to make people see cash is being debased. It is kind of funny that cash is king when Ben Bernanke underlying view is that to restor aggregate demand for the economy you need to make it the least attractive asset to hold.

[12DrinkMore]

12D - You conveniently ommited the following part of the reports:-

Royal Bank of Scotland (LSE: RBS.L - news) powered forward this morning despite sliding into a first quarter loss of £44m with its profit and loss statement again wrecked by write-offs, despite this the share price was up to 47.40p +13.94%

Yes, it's all a big nonsense. Obviously somebody has decided that the rate of losses has decreased so that the bottom has been reached and it is all up UP UP from here on in. The share price is standing at around 10% of

But finally the overburdened UK taxpayer is making an absolute KILLING

The bank, which is 70 per cent owned by the taxpayer following the Government's intervention to bail it out last year, remains locked in negotiations with the Treasury over the terms of the Asset Protection Scheme.

There will be massive parties when all the gains are paid out... :D

[12DrinkMore]

I think the whole argument about the manipulation of the CPI numbers is fascinating. Bernanke's theory as opposed to his Doctrine is that the deflation in Japan was caused by an inability to create inflationary expectations. While the deflationists appear to be right at the moment you cant get away from the simple fact that the best cure for a debt problem is inflation. Bernanke has tallked about 3-4% inflation targets under zero interest regimes but readily admits that this could lead to hyper-inflation. He just considers this more preferable than deflation which he is as ultra-destructive.

The inflation/deflation story is a hard one to comprehend.

There is acceptable good deflation, which the West has been enjoying since it started importing goods from Asia rather than manufacturing themselves. The price of everything from mobile telephones, computers, LCD TVs, white goods and cars has been deflating for a decade. Or maybe better said, the performance and features have been increasing while the price has remained stable or, in a lot of technology, deflating. Even travel has had its periods of deflation. But somehow this is OK, as even though people know that in six months the price will drop and the performance increase, the stuff was still purchased, presumably on the expectation that in a year it will be replaced by the next model. But this "good" deflation was never an issue, because it enabled the government to produce a low CPI figure.

And there is unacceptable bad deflation, where the price of stocks and houses decreases, causing stock markets to fall and indebted house purchasers to simply walk away from the negative equity. (Maybe if the US could repeal the law, so that it was no longer possible to just walk away from a house and mortgage, a chunk of the problem might disappear)

And there is the opposite, where we have good inflation, mainly in house prices and stock markets.

But "bad" inflation doesn't seem to be on Our Leaders' agenda, they have been obscuring the real rate of inflation in terms of essential items by mixing in the "good" deflation from Asian produce. We have all seen our personal cost of living going up far more than the published CPI figures for last decade, unless you have been eating memory sticks and washing with mobile telephones.

But maybe we have reached a saturation point in the West, where people just don't want to buy or replace anything? If you already have two cars in the garage, four mobile phones that play MP3, TV, take photographs, two computers that play all the games you ever need, a washing machine, a digital camera with a zillion pixels that is drop proof, waterproof with images stabilisation and can take and store 10,000,000 photos that can be blown up to the size of a house wall what else do you need to buy?

Have we come to a pause in the consumerism? Maybe it has collectively dawned on us that we don't need another TV, or another zillion pixels, or a bigger screen on the mobile telephone? Maybe people are thinking that it is better to pay down start saving, as they have no faith in the governments to provide health care and pensions into the future? Maybe people are thinking that they don't want to put themselves into debt so that the bankers can earn billions in bonuses? Maybe collectively people have realised that the stock market is not a one way bet, but a huge roulette wheel with ups and downs only vaguely related to company performance? Maybe equity from property is no longer considered to be the insurance for old age?

Are people coming to their senses and realising that playing the credit cards, personal loans and mortgages is simply leaving them poorer and putting their earnings into the hands of the rich? I believe this is happening and that, in spite of the vast quantities of money being created by the central banks, there will be further contractions until personal debt levels are reduced, or even paid off as people move into saving rather than spending, realising that the only person who is going to provide for a decent living after retirement is THEMSELVES and not any bankrupt ponzi government or company pension scheme.

So maybe the threat of hyperinflation, due to too much money chasing too few goods, is not going to occur? If people do not borrow the money (after all it is not exactly being given to them (maybe that is the next step ), then it will stay within the banks. And what will they do with it? Presumably start spending on stocks and bonds, fuelling a stock market bubble in the process? Maybe this had already started and we are seeing the result in the stock market gains?

Why do I have a nasty feeling that we are being screwed again and again?

[flying]

China only made its wealth by pegging its currency at an undervalued rate against the US dollar so should we really be concerned about what will effectively be the largest foreign debt default in Global Economics.

I saw something funny written the other day.

I cannot quote it word for word as I do not remember but it was along the lines of....

When We owed China Billions they owned us

Now that we owe China Trillions we own them

Odd to think & true I imagine in some ways.

But for how long? I cannot help but wonder?

I know they are happy to be on the back of a tiger in a sense.

But if they sense the Tiger is dying? If they use as much of the

fiat as possible to buy something real......Yes they would still have tons left.

But...eventually doesn't it become obvious when something is becoming worthless? Will they stay on the tiger even when he has trouble carrying his own weight?

They ( all of Asia I mean ) are becoming the new world power.

They produce things.....They gave up their savings & ability to have many things so they could have jobs building things to sell to us.

We have been paying with...debt? We have few if any real products to sell.... .....Our money seems more & more surreal.

Is this right?

[flying]

So maybe the threat of hyperinflation, due to too much money chasing too few goods, is not going to occur? If people do not borrow the money (after all it is not exactly being given to them (maybe that is the next step ), then it will stay within the banks. And what will they do with it? Presumably start spending on stocks and bonds, fuelling a stock market bubble in the process? Maybe this had already started and we are seeing the result in the stock market gains?

Why do I have a nasty feeling that we are being screwed again and again?

Here in the US as you know borrowing is occuring right now...Yes we the people are not the ones borrowing but it is we the people who are paying.

Many did save & many have cash....Guess who is getting screwed?

It is a beautiful setup....FDIC will protect your savings yes they will

No problem but for the trillions they print our cash is worth less & less.

So yes the FDIC will give you back yours if that bank fails but they can never give you back the buying power it had before. So I do in a sense see inflation picking up speed.

The forces that are pushing prices down are temp. They will eventually be done.

Businesses will be closed & cheap invetory sold off. Then prices will start to rise again & lenders will raise interest. Folks just like in Russa will see that cash is not the place to be & will want stuff instead. Prices will rise more.

What will happen when the Fed needs to raise interest? What happens to our National debt? Like Schiff said we are on a teaser rate right now. When interest rate on our debt rises what will happen?

TSHTF...price control?= black markets etc.

Hope for the best but I just do not see how this pumping out fiat that is not back by goods/services....is not earned..... can end well.

Sadly I think maybe Naam is right

reading Thaivisa i realise each and every day that the majority of members are committing the biggest mistakes an investor can make. instead of being flexible they are stubborn. instead of looking at a variety of currencies they only know their "home" currency and wait that goddess Fortuna lifts the exchange rate of the currency in which they derive their income or dream about skyrocketing value of their gold holdings.

I should start learning everything I can about other currencies...except I fear I have both too little time & too little $$$

Edited May 9, 2009 by flying

[Naam]

2. i [not so] humbly beg to differ Abrak. China had and has no other choice than to invest the trade surplus with the U.S. in US-Dollars. the bitching we hear from various sides and threats to switch from USD is a wet dream of some lower ranking politicians and economists. those who are in charge know that they are riding a tiger and that it is definitely safer on the back of a tiger than jumping off.

Quite amazing how Naam equates important issues to having " wet dreams "

1. None of the USA States will ever secede a because it's just a wet dream of the various Governors-according to Naam

2. And now another wet dream theory-

China may not " switch from USD " quickly- but there is plenty of new evidence China is preparing to reduce its exposure to USA assets.

where's the relevant youtube clip that provides "plenty of new evidence"? besides... there is a big difference between "switching from USD" and "reducing USD denominated assets". those who can read and understand a sentence and its context have a clear advantage over others

[Naam]

Sadly I think maybe Naam is right

reading Thaivisa i realise each and every day that the majority of members are committing the biggest mistakes an investor can make. instead of being flexible they are stubborn. instead of looking at a variety of currencies they only know their "home" currency and wait that goddess Fortuna lifts the exchange rate of the currency in which they derive their income or dream about skyrocketing value of their gold holdings.

I should start learning everything I can about other currencies... except I fear I have both too little time & too little $$$

i made a mistake Flying and mentioned currencies only. besides currencies i should have added "a variety of other assets"

[flying]

i made a mistake Flying and mentioned currencies only. besides currencies i should have added "a variety of other assets"

True & at times I think............It seems obvious where there is production..that is where the new markets/assets will be...So I should be looking.

But my self employed situation is a catch 22

When times like this past year hit I basically live completely off of what I had.

I do not own income generating assets. So as times get worse my ability to invest grows smaller too.

[Abrak]

I am one of those people sitting on the sidelines. I have nt done too bad over the last 3 years apart from owning 8 properties in Thailand.

Does anyone have a really good idea to make money. Please dont simply state it - give the justification too.

[cloudhopper]

1. Except for the occasional TV member, I think we can all admit that we have made the occasional stupid investment in our lives but hopefully we learn from it and move on. What we dont do is whinge about them.

2. I find the Chinese who thought it was wise to lend US$1tr to the country that owned the printing presses, should simply admit that it wasnt a very smart idea if it goes wrong rather than whinge about US monetary policy and then threaten to stop buying USTs.

1. that goes without saying. but even if we have learned to avoid those mistakes we made we will still make new mistakes over and over again. however, the one and only thing that counts is the bottom line! reading Thaivisa i realise each and every day that the majority of members are committing the biggest mistakes an investor can make. instead of being flexible they are stubborn. instead of looking at a variety of currencies they only know their "home" currency and wait that goddess Fortuna lifts the exchange rate of the currency in which they derive their income or dream about skyrocketing value of their gold holdings. last not least... instead of informing/educating themselves what possibilities exist to overcome or avoid losses and achieve decent returns they are wasting their time discussing the 150 Baht ATM fee.

2. i [not so] humbly beg to differ Abrak. China had and has no other choice than to invest the trade surplus with the U.S. in US-Dollars. the bitching we hear from various sides and threats to switch from USD is a wet dream of some lower ranking politicians and economists. those who are in charge know that they are riding a tiger and that it is definitely safer on the back of a tiger than jumping off.

You know I hear a lot about the USD hegemony but why exactly is it doctor that China has no other choice than to buy US debt with it's USD trade surplus? What would happen if they chose to buy gold or uranium or oil or foreign rice paddies instead of USTs?

[Naam]

You know I hear a lot about the USD hegemony but why exactly is it doctor that China has no other choice than to buy US debt with it's USD trade surplus? What would happen if they chose to buy gold or uranium or oil or foreign rice paddies instead of USTs?

a number of reasons exist CH but i refrain from listing them and post two links although i am not particularly a friend of "seekingalpha":

http://seekingalpha.com/article/125797-why...-u-s-treasuries

http://seekingalpha.com/article/107308-chi...its-best-option

[cloudhopper]

You know I hear a lot about the USD hegemony but why exactly is it doctor that China has no other choice than to buy US debt with it's USD trade surplus? What would happen if they chose to buy gold or uranium or oil or foreign rice paddies instead of USTs?

a number of reasons exist CH but i refrain from listing them and post two links although i am not particularly a friend of "seekingalpha":

http://seekingalpha.com/article/125797-why...-u-s-treasuries

http://seekingalpha.com/article/107308-chi...its-best-option

Hmmm well the 1st article only quotes the opinion of an economy professor who makes that statement without offering any justification and the second makes the argument that China has to do it's part to keep the $ Ponzi scheme from collapsing. Compared with all the $ out there China does not control the fate of the USD - but when it's value destruction becomes apparent it will join the stampede out along with everyone else IMO (and I might add, as they rightly deserve for their mercantilist currency policies).

[flying]

a number of reasons exist CH but i refrain from listing them and post two links although i am not particularly a friend of "seekingalpha":

http://seekingalpha.com/article/125797-why...-u-s-treasuries

http://seekingalpha.com/article/107308-chi...its-best-option

Interesting & as usual I really like the comments at the end of the first link best

Still at the end of the day unless something really miraculous happens here I just dont see how this relationship can last. Even in the article it states a 10 to 1 effect. Our buying slows by 1% their exports drop by 10%

If true what will happen if our buying should drop 10% in the coming year?

I still have a hard time not thinking China will seek & find greener pastures soon enough.

[Abrak]

You know I hear a lot about the USD hegemony but why exactly is it doctor that China has no other choice than to buy US debt with it's USD trade surplus? What would happen if they chose to buy gold or uranium or oil or foreign rice paddies instead of USTs?

a number of reasons exist CH but i refrain from listing them and post two links although i am not particularly a friend of "seekingalpha":

http://seekingalpha.com/article/125797-why...-u-s-treasuries

http://seekingalpha.com/article/107308-chi...its-best-option

Thanks for those posts Naam, they both make interesting points that I hadnt given much thought (unfortunately I am not in a position to claim that this compliment holds much value.)

I do also consider that there are a number of other issues. First, there seems little doubt that the huge Chinese C/A surpluses were generated by pegging Chinese currency at an artificially low rate against the US dollar. This has been to China's advantage and to a large extent at the expense of the USA in that it has exported capital, spending and jobs from one country to another. On that basis, China has a moral obligation to assume responsibility for the US debt created as a result as well as accepting that if it ultimately has to assume losses as a result of holding those debts, if they hadnt assumed them, unlike the average investor, it is to a certain extent to their net material disadvantage.

Personally I do not think that either they had 'no choice' other than to invest in USTs or that it was necessarily their 'best economic option'. For instance they could have bought up US assets such as US corporates. As far as I can see accumulating physical assets would have had much the same economic effect as accumulating USTs but it would essentially have been an act of 'bad faith' on the basis that if you are destroying value in the US by pegging your currency at an artificially low rate against the dollar it would be wrong to use the profits generated by this to buy up assets that you had devalued.

Personally, while I accept that by buying US debt at low rates etc there may have been some short term benefit to the US in that this allowed the US to maintain an average MPC of 108% between 2000 and 2008 which will clearly go down in history as a rather remarkable achievement - has there ever been another major economic power to have achieved this i.e. not Latvia? It is however (as someone as previously mentioned) essentially a Ponzi scheme (to the estent that even if both countries see it to their material advantage) it is not sustainable. Marginal productivity of US debt accumulation is currently running at around 15 cents in the dollar.

As a Ponzi scheme it is reaching the stage that it cannot continue. The Chinese C/A surplus has shrunk from a monthly surplus of US$40bn to US$5bn (plus it is now running a large fiscal deficit). Meanwhile the US financing requirement has increased around 4 fold for the current year to US$2trn (ie around USS180bn a month and Japan cant help out either).

This all maybe of benefit to someone - say Iraq which the US is currently financing a war that it can longer afford and will presumably have to curtail - but it is not even obvious that this is even in the best interests of Iraq (but I havent given this much thought I am not really interested.)

If you look at the official Obama forecasts for the US economy (i.e. the CBO numbers released in March) and leaving aside the fact he has apparently forecast that he can achieve an economic miracle in the US without even trying to justify it, there is one rather obvious inconsistency that stands out in the US numbers. (Following numbers only accurate to the odd US$100bn - which is now regarded as such an insignificant figure that it is only a rounding error.)

The CBO estimates a US fiscal financing requirement of about US$2trn (I know that doesnt sound much these days but it is actually quite a high figure - US GDP I think is less than US$15trn - and they are a big economy (accounting for around 30% of world consumption although I readily admit that their consumption is totally out of proportion to their income.)

Anyway back to the basic stats. The CBO numbers correctly assume that this financing deficit will not be assumed by China and Japan (afterall they only bought US$400bn of USTs last year when they had major economic surpluses which have subsequently disappeared). They assume this liability is taken on by the US general public. To me, while I readily admit that forecasting anything else would either be less feasible or an inherent admission to default on existing US debt, it is slightly absurd on the basis that they are forecasting a 1% fall in consumption from a consumer that hasnt even been self financing in the last 10 years. (USA holdings of USTs are currently around US$5trn so a US$2trn increase is quite large.)

This assumption would seem particularly absurd on the basis that if say the MPS increased sufficiently to actually finance this deficit presumably this would happen because households were paying down excess debt. Afterall US debt per household is usually estimated at anywhere between US$160k to US$2.2m and interests charged on these debts are definitely higher than interest rates received on USTs. I realize that is a very wide range but for various reasons the number is debatable. I also realize that US$2.2m figure sounds totally impossible on the basis that UST yields could not be reconciled with this figure. I would however point out that the statistic comes from Wikipedia and although I realize that this is not the classiest reference point they clearly have more credibility than me and are generally regarded as an acceptable point of reference for an internet posting. Basic economic theory would suggest that if they raised rates to finance the spending they would only be 'crowding out' even more C anf I for which they are only spending to replace.

If I am going to claim that Wikipedia is an acceptable source of reference for an internet posting I should at least admit this post is unacceptably long. So I will stop but given that someone might have read this whole posting and then feel slightly irritated that I havent told you how they have justified these forecasts, I will simply say they didnt try to.

There is a very obvious solution how they are going to resolve this simple equation but I think it is somewhat 'bad faith' not to admit to it.

[Naam]

There is a very obvious solution how they are going to resolve this simple equation but I think it is somewhat 'bad faith' not to admit to it.

Abrak, Cloudhopper;

we can discuss and speculate till doomsday whether or when China starts dumping USD or the demise of the Dollar (which i've been hearing since "Nixon/gold" in the early 70s). fact is and remains that the US-Dollar will for years to come play a dominant role in global finances.

a "stampede" out of the Dollar would in my [not so] humble view cause bigger havoc than what we have seen for the last 1½ years and still see now.

yes, i admit that the Chinese are talking using subtle threats and mentioning alternatives but so do the Americans and that goes on ad nauseam since years. but talk is cheap and the tool of politicians who talk 90% and act 10%. in the end a pragmatic approach will be the result.