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Offlinephi1618
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Registered: 02/14/04
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America's debt
    #3347420 - 11/11/04 05:23 PM (12 years, 5 months ago)

The American government is spending alot of money in Iraq right now, contributing to our deficit. The American people are spending money and going into debt to buy cars and electronics. None of this money is invested; this money is just spent on toys that will get progressively less valuable and take progressively more maintainence till they aren't worth anything.

Furthermore, America has an aging population (though immigration is bringing in young people) and a soon to be busted social security system.


Why do Americans (people and government) borrow so much? Because we can, at very low interest rates. Interest rates have been held to super-low levels by the Fed, and inflation has remained low in spite of it.


How does this work? Typically, as debt builds up, interest rates would rise, because the risk in lending money incrases.

The reason that we have been able to keep interest rates and inflation so low is that the Chinese are lending all the money we give them right back to us.

In other words, the Chinese are indirectly financing the war in Iraq, as well as our SUVs and cell phones.

Why?

The Chinese government pegs the renmimbi (chinese currency) to the dollar. If it weren't for this peg, the renmimbi would rise, which would hurt Chinese exports. To keep this peg, the Chinese government has to be willing to sell unlimited renmimbi for dollars, or else a black market would develop. As a result, the Chinese government buys a shit ton of American dollars from Chinese exporters.

What does it do with all this American money? Some of it is used to buy foreign assets, like oil fields, but an awful lot of it is used to buy American Treasury bonds.
By buying American debt, the Chinese are keeping our interest rates low.

Basically, what is happening is that the Chinese send us clothes and electronics and we send them IOUs.

So, what happens when the Chinese change their currency peg, perhaps moving to a basket of currencies rather than a pure dollar peg? At that point, the Chinese gov't won't have to buy as much American debt. This means that interest rates for government debt will go up, and the Fed won't be able to keep interest rates for the people as low without causing massive inflation.

Keep in mind that soon the baby-boomers will retire. At that point, the rest of us will be paying out the ass for their already spent social security dollars. Even if social security gets a major overhaul, there'll still be some poor old people who were counting on their social security money to get them through retirement. Whether through government or private spending, Americans are the ones who will have to take care of them.


What this all means is that by spending money like we are, both in government and private life, we are digging ourselves a hole. At this rate, we will no longer be the preeminent world power in twenty years. We will fall without losing a single battle, simply because we are spending more money than we have, encouraged always by our dear freinds, red China.

Those who claim that the terrorists don't understand American determination would do well to remember Bin Laden's recent video, in which he claimed that his strategy was to exaust the Americans, by causing us to fight more than we can afford. What is happening in Fallujah? We will win, easily. But, we will spend millions and millions of dollars, without destroying our terrorist enemies.


We are vulnarable, not to being destroyed directly, but to our own short-sighted spending habits.


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Offlinelonestar2004
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Re: America's debt [Re: phi1618]
    #3347444 - 11/11/04 05:27 PM (12 years, 5 months ago)

japan use to do the same for us. bush says the debt will go away as long as we have 3% to 4% growth every year. i am skeptical.


--------------------
America's debt problem is a "sign of leadership failure"

We have "reckless fiscal policies"

America has a debt problem and a failure of leadership.

Americans deserve better

Barack Obama


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OfflineAncalagon
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Re: America's debt [Re: phi1618]
    #3347476 - 11/11/04 05:31 PM (12 years, 5 months ago)

Quote:


So, what happens when the Chinese change their currency peg, perhaps moving to a basket of currencies rather than a pure dollar peg? At that point, the Chinese gov't won't have to buy as much American debt. This means that interest rates for government debt will go up, and the Fed won't be able to keep interest rates for the people as low without causing massive inflation....



Great article, some additional material:

[...]I turn on the TV and watch the BBC and Japanese news as well as news from Germany and France. The big story? The US dollar is taking a severe beating this week; it looks like it might lose 5% of its value this week alone. In the last four years the US dollar has lost somewhere near 40% of it's value versus the Euro; people have begun to say their final words of parting.

I switch the TV to CNN. The big story in America? US forces alongside a couple of unemployed Iraqis are blasting some dumpy city in Iraq for some such reason. Shoot. Shoot. Shoot. Spend. Spend. Spend. And for what? Perhaps they are trying to "even the playing field" by making you folks in America just as broke as the Iraqis.

Any stories on CNN about the US dollar in danger of becoming a junk currency? Nope.

Many years ago, the world economy was pegged to the British Pound Sterling. But after the "fall" of the British empire, the economic factoring switched to the US dollar as a tool for measurement. Now, with the US dollar heading for the garbage bin, some people think that the Euro will take over. But according to several presidents of investment firms that were speaking on the BBC, that's not going to happen. Why? Because they said that the Euro is a "political currency." What is going to happen, according to these folks, is that the world's economy is soon to be pegged to the Chinese Yuan; which is an "economic currency."

Now, I am no economics expert, but I do have enough sense to allow my wife to handle all of our finances, so I'm trying to spell it out very simply for you folks here. I have read several articles on Lewrockwell.com recently dealing either directly or indirectly with this matter that I can recommend to you if you want to read what others (who undoubtedly know a whole lot more on this subject than I do) have written: One by Gary North; one by Paul Craig Roberts; and also one by Charlie Reese. Read them all; they make frightening common sense.

Anyway, due to the drop in the dollar, the Chinese Yuan has also dropped 40% because it is pegged to the dollar. But that's all going to change. And that's not conjecture on my part: That's a fact. China wants to join the World Trade Organization (WTO) in 2007. And one of the rules of the WTO is that the currency of all member countries must be floating. Give you one guess what's going to happen to the dollar by the year 2007 when China floats the Yuan. That's right... Did I already mention the high possibility of the US dollar becoming junk currency? I did? Fine. Also, 2007 sounds like a long way off, but it's not; it's only two years.

Also don't forget that this will happen as China will join the WTO and will also host the Summer Olympics in 2008.


--------------------
?When Alexander the Great visted the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: 'Yes, stand a little less between me and the sun.' It is what every citizen is entitled to ask of his government.?
-Henry Hazlitt in 'Economics in One Lesson'


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InvisibleGreat_Satan
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Re: America's debt [Re: Ancalagon]
    #3347513 - 11/11/04 05:38 PM (12 years, 5 months ago)

You terrorists aren't fooling anyone.


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OfflineAncalagon
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Registered: 07/30/02
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Re: America's debt [Re: Great_Satan]
    #3347524 - 11/11/04 05:40 PM (12 years, 5 months ago)

Quote:

Great_Satan said:
You terrorists aren't fooling anyone.



Uh, er, I consider that a flame -- can he be banned? Now?


--------------------
?When Alexander the Great visted the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: 'Yes, stand a little less between me and the sun.' It is what every citizen is entitled to ask of his government.?
-Henry Hazlitt in 'Economics in One Lesson'


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Invisiblesilversoul7
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Re: America's debt [Re: Great_Satan]
    #3347535 - 11/11/04 05:41 PM (12 years, 5 months ago)

:banbanban:


--------------------


"It is dangerous to be right when the government is wrong."--Voltaire


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Offlinezappaisgod
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Re: America's debt [Re: phi1618]
    #3347543 - 11/11/04 05:43 PM (12 years, 5 months ago)

Was that an article? Or your own thoughts? If an article please post a link.

Ancalagon, you're no expert so you let your wife handle your finances! So you're going to "spell it out very simply" for us folks?????

I generally don't go for the chicken little theory of international economics. I'm not worried. I've seen it all before


--------------------


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Offlinephi1618
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Re: America's debt [Re: zappaisgod]
    #3347725 - 11/11/04 06:15 PM (12 years, 5 months ago)

Quote:


Was that an article? Or your own thoughts?



The words are mine.

Quote:

japan use to do the same for us.



This is a good point; not only japan, but Europe as well.
The Bretton Woods system from 1944-1971 pegged many major world currencies to the price of gold. This resulted in pretty much the same thing as the renmimbi-dollar peg - Japan and Europe purchased American debt.

From eh.net:
Here are figures for US inflation, 1960-1980:
1960 1.72
1961 1.13
1962 1.12
1963 1.10
1964 1.37
1965 1.62
1966 2.92
1967 2.84
1968 4.26
1969 5.29
1970 5.94
1971 4.31
1972 3.31
1973 6.20
1974 11.11
1975 8.98
1976 5.75
1977 6.62
1978 7.59
1979 11.28
1980 13.48

Here are figures for short term interest rate, ordinary funds, contemporary series (I don't know what all that means):
1960 2.87
1961 2.36
1962 2.77
1963 3.16
1964 3.54
1965 3.95
1966 4.86
1967 4.29
1968 5.34
1969 6.67
1970 6.39
1971 4.33
1972 4.07
1973 7.03
1974 7.83
1975 5.77
1976 4.97
1977 5.27
1978 7.19
1979 10.07
1980 11.39


Another figure I'd like, but haven't found yet, would be the current-account deficit as a portion of GDP for the same period, which now stands around 5.5%


In any case, you can see that the 70s were alot worse than the 60s, and that the interest rates and inflation started creeping up before the end of the Bretton Woods system. Also, don't forget the influence of Vietnam.


Quote:

I generally don't go for the chicken little theory of international economics. I'm not worried. I've seen it all before



fair enough. I might have intentionally given a worst-case analysis, in spite of the fact that I don't really know shit.
But, I think our current account deficit is probably a greater threat to our way of life than Islamic terrorists, and would like to focus on it rather than having all these "the sky is falling! The evil Muslims are taking over!" threads.


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Offlinezappaisgod
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Re: America's debt [Re: phi1618]
    #3347782 - 11/11/04 06:27 PM (12 years, 5 months ago)

You may note that I don't much go for those "the sky is falling Muslim terrorists are taking over" rants either. I just say we need to kill them, and if we decide to we will.

How come all your tables end 25 years ago? If you want to cite Vietnam as an influence on the economy you have to concede that there is a major time lag in it's effect. It ended in '72 through '74 and the shit didn't hit the fan until '78. And that should probably be ascribed to the energy panic of circa'74 and the utterly incompetent and embarrasing Carter administration which managed to fuck things up until '82


--------------------


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Offlinephi1618
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Re: America's debt [Re: phi1618]
    #3347827 - 11/11/04 06:41 PM (12 years, 5 months ago)

Ok, I have information now on the US current account from 1960-2003, here:
http://www.somc.rochester.edu/Nov03/schwartz.pdf


Basically, the Bretton Woods system was totally different than what we have now. During the sixties, we had a current account surplus, which means that we were lending more money to foreigners than we were borrowing from them.

We have had a current accound deficit since 1985, and it is now higher as a portion of GDP than ever before.

This means that we are borrowing money from the rest of the world, and that we weren't net borrowers before 1985.

Furthermore, since our money is being spent on weapons and consumer goods rather than being invested in factories and infrstructure, we won't be making money in the future from the money we're spending now.




I should point out that I'm considering current acount deficit rather than government deficit because I'm interested in how much money we, the American people (sorry if you're not) owe to foreigners, like the chinese, and not how much money poor americans owe rich ones. Of course, if the government borrows a bunch of money from the Chinese to pay for a war in Iraq, that adds to the current account deficit.


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Offlinephi1618
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Re: America's debt [Re: zappaisgod]
    #3347850 - 11/11/04 06:47 PM (12 years, 5 months ago)

I was responding to lonestar, comparing our situation now to the situation after WW2. Really, the tables don't do a very good job in proving my point; if they did, interest rates and inflation should rise around 1971. Instead, as you point out, they rise around the time of Vietnam and the oil crisis, and 1971 doesn't appear to be very important. But, since I went and found the data, I decided to share it even though it didn't prove my point.


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Offlinephi1618
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Re: America's debt [Re: zappaisgod]
    #3347871 - 11/11/04 06:50 PM (12 years, 5 months ago)

Quote:

I just say we need to kill them, and if we decide to we will.




My point here is that it takes money to kill Muslims, money that we can't ever expect to see a positive return on. Furthermore, we're in alot worse financial shape than is widely accepted as it is, so we souldn't be playing lone ranger with the terrorists.

The reason we aren't hurting as it is is because of the Chinese, who probably wouldn't exactly cry if we found ourselves up shit creek. The more money we spend on things like the Iraq war that we don't really need, the worse shape we'll be in a few years down the road.


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InvisibleRandalFlagg
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Re: America's debt [Re: phi1618]
    #3347877 - 11/11/04 06:53 PM (12 years, 5 months ago)

I am no economist either...and complicated theories about debt,
currency, and inflation make my head spin.

How long do you think it will be until things get bad for the
American dollar(and therefore the American people)? What do you
think will happen when things go bad? Will the U.S. dollar be
devalued for example(like what happened in Venezuala a few years ago
I think). Will mass chaos occur as America's wealth turns to
shit?


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Offlinephi1618
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Re: America's debt [Re: RandalFlagg]
    #3347916 - 11/11/04 07:06 PM (12 years, 5 months ago)

Quote:

Will mass chaos occur as America's wealth turns to
shit?




I sure hope not... and I don't think so, either.


What I think may happen is that the debt burden of US households and government will increase; China will gradually unpeg its currency, probably by moving through a currency basket rather than immediately moving to a floating currency; interest rates for federal bonds will increase; the housing market will cool off; people will spend less money; the older people will begin to retire...


Basically, I would not be surprised to see a long period of stagnant economic growth and job loss, a fall in the stadard of living for the average American, and an end of to era of American dominance of geopolitics.

I'm don't know when this will happen, but I wouldn't be surprised if the present economic growth happens to be shorter and smaller than expected, followed by a pretty bad recession, and another pretty dismal recovery.


However, I seriously doubt that there will anything as extreme as the great depression or a major collapse of the dollar, even if we fail to respond to the threat and keep spending money like a drunken tourist in Vegas.


Pretty much, all I'm saying is that things are pretty good for the American people right now, so we feel like we can spend all the money we want. But, these good times won't last because they are being funded by borrowing, and not an actual increase in the productivity of American businesses. So, we should all save a little now for the inevitable slow down.


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InvisibleRandalFlagg
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Re: America's debt [Re: phi1618]
    #3347984 - 11/11/04 07:25 PM (12 years, 5 months ago)

Because of the American debt, I think it is possible that the
American dollar will face serious problems. I don't know what
will happen. The currency could be devalued and a massive depression
could occur, or the government might raise taxes dramatically
in order to deal with it. I have a feeling something bad is going
to happen; whether that means a slow painful decline or a sudden
calamity.

I have actually considered moving to another country for two reasons:

1. My wealth that I do have(a small inheritance) will be
turned worthless in the face of a massive economic collapse.

2. Things might go down the shitter in America because of
an economic collapse(massively high crime rates, anarchy, etc...)

Canada is actually a possible option. How funny is that...moving
to a country rife with socialism and I hate socialism. But, I would
rather have 1/2 of my income taken away from me, get some
government services(such as universal health care), and not have
to worry about economic collapse than have 1/3 of my income taken
away from me and face a possible economic catastrophe.


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Offlinezappaisgod
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Re: America's debt [Re: RandalFlagg]
    #3348007 - 11/11/04 07:32 PM (12 years, 5 months ago)

If the value of the dollar goes down against the Euro then American goods will be cheaper and more desirable. American business will benefit and more jobs will be available. Isn't that what all the Dems were bitching about? It's a homeostatic system that mostly takes pretty good care of itself. The expense of the Iraq war does not, in my opinion, come up to the level of a catastrophic economic upheaval. Nothing to see here folks, move along. Let's continue to scream about Soc Sec and not get distracted.


--------------------


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Offlinephi1618
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Re: America's debt [Re: zappaisgod]
    #3348268 - 11/11/04 08:30 PM (12 years, 5 months ago)

Quote:

Let's continue to scream about Soc Sec and not get distracted.




soc sec is far worse than the Iraq war, it's true. But, the war isn't exactly cheap, close to $150 billion, or $1000 out of your pocket, more than likely.


edit: plus, the more war we wage, the more expensive it'll get.


Edited by phi1618 (11/11/04 08:36 PM)


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Offlinephi1618
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Re: America's debt [Re: RandalFlagg]
    #3348271 - 11/11/04 08:32 PM (12 years, 5 months ago)

Really, there's "possible economic catastrophe" wherever you live. If America went down the shitter, there's a good chance that Canada would follow.


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