Federal Reserve funding US budget deficit

[MSimon]

Thanks vankirkc, I had not heard that the Fed is not likely to continue additional Treasury security purchases. That is a major relief that the Fed is not going to monetize the US debt. Of course, that leaves the question of where the US will get the loans for their projected $9 trillion deficit.

As the budget insanity unfolds...

Watch interest rates. H/T TallDave

[MSimon]

The US consumer is in too much debt and has next to no savings; it would be really dumb to try and base any durable recovery on exports to the US.

But what if that is all you have got? You will want to back out of the room slowly.

[MSimon]

It all depends on what you go into debt for.

Are you buying groceries or a farm?

[vankirkc]

The fact that the dollar is a reserve currency has allowed the US to overconsume and export much of the harmful effects of the inflation. China has quite enough mortgage backed securities and other US junk bonds and they have quite enough US treasuries that will be paid back in devalued dollars. Why would they want more?

Why indeed, especially at a moment when it doesn't look like a great investment. What's the only thing worse than a bad future investment? Seeing China's economy collapse around their ears now. A trade surplus is a double-edged sword.

I agree with you that we won't likely see China pulling out of the dollar market anytime soon, however...they don't necessarily have to buy debt. I think we'll see them shift more toward equity investments in the future, which should reduce the demand for government debt (they're #1 buyer right now I think...)

The flip side of having a strong currency is that our producers have been forced to become much more efficient. As the dollar falls, exports grow. The more it falls, the better for producers -- and our consumers are happy to buy American if that's the better deal. And since our debt is dollar-denominated, the pain is felt by those holding our devalued debt.

We have producers? Oh, the ones in Hollywood you mean?

The US consumer is in too much debt and has next to no savings; it would be really dumb to try and base any durable recovery on exports to the US.

Well, it depends. True, the U.S. private debt is highly leveraged after the recent decline in assets (and savings rates have risen in response), but that doesn't mean we don't still have the most disposable income in the world, and the most generous trade laws.

I'm not sure this is true. There's no doubt that we dispose of the most income in the world, but if you factor in household savings some of the countries in Asia do pretty well. Perhaps not in dollar terms, but the dollar is over-inflated anyway.

There's a common misconception that debt is a bad thing per se. But in fact the poorest countries in the world are also the places where people have the least debt, as Hernando De Soto details in his book The Mystery Of Capital. Collateralization drives growth by creating liquid, transferable capital.

I agree with you there. The problem is that much of the debt in the U.S. wasn't investment related. Too many SUVs and super wide screen plasma TVs in McMansions.

[TallDave]

We have producers? Oh, the ones in Hollywood you mean?

Heh. Well, cultural dominance aside, we still lead the world in ag production, software, and highly specialized machinery. We're also #3 in oil production, which surprises a lot of people.

I hadn't realized until watching the Modern Marvels series just how highly mechanized American production has become. We have gigantic machines everywhere, doing everything from making utility poles to mining salt. Human labor is an increasingly smaller piece of the cost.

There's no doubt that we dispose of the most income in the world, but if you factor in household savings some of the countries in Asia do pretty well. Perhaps not in dollar terms, but the dollar is over-inflated anyway.

Other than Singapore (pop. 4m), none of them are closer than about 3/4 of our PPP GPD per capita. Japan is the closest at ~34,000 to our ~45,000.

To some extent, high savings are probably driven by currency policy (why spend if your gov't is deliberately making things more expensive?), but I think it's going to be hard to shift that demand to their own people concomitant with American competitors gaining advantage: if American consumers are being propped up, so are foreign producers. That's why some of us have regarded a currency-driven trade surplus as a kind of economic fool's gold: it gains a short-term benefit, but unwinding can be very painful, as Japan found out with their recent double-digit GDP decline.

I agree with you there. The problem is that much of the debt in the U.S. wasn't investment related. Too many SUVs and super wide screen plasma TVs in McMansions.

That's actually one of DeSoto's points: by collateralizing consumer goods, you create new markets for them. That in turn creates a multiplicative benefit along the supply chain.

[vankirkc]

...cultural dominance aside...

This kind of thinking is what gets us into trouble. What makes you think that the U.S. culture is 'dominant'? Have you been out in the world? The places I've been overseas have pretty much uniformly been different, culturally, from the U.S..

The U.S. movie industry exports a lot of titles, true. But movie watching doesn't define a culture.

Other than Singapore (pop. 4m), none of them are closer than about 3/4 of our PPP GPD per capita. Japan is the closest at ~34,000 to our ~45,000.

You realize of course that the figures you are quoting have adjusted downward by about 15% since December due to depreciation of the value of the dollar. I think you overestimate the long term strength of the dollar, which largely drives the high purchasing power of the U.S. consumer.

To some extent, high savings are probably driven by currency policy (why spend if your gov't is deliberately making things more expensive?), but I think it's going to be hard to shift that demand to their own people concomitant with American competitors gaining advantage: if American consumers are being propped up, so are foreign producers. That's why some of us have regarded a currency-driven trade surplus as a kind of economic fool's gold: it gains a short-term benefit, but unwinding can be very painful, as Japan found out with their recent double-digit GDP decline.

There are signs that this is changing. The new government in Japan is all about spending and fostering local markets.

I agree with you there. The problem is that much of the debt in the U.S. wasn't investment related. Too many SUVs and super wide screen plasma TVs in McMansions.

That's actually one of DeSoto's points: by collateralizing consumer goods, you create new markets for them. That in turn creates a multiplicative benefit along the supply chain.

The trouble is that those benefits are realized in China, not the U.S.. Or Pakistan, or India, or Japan, or Korea, etc. Wherever the goods involved are actually being produced..which more than likely isn't the U.S..

[vankirkc]

WSJ remarks on OP's topic.

http://online.wsj.com/article/SB125193069297181241.html

[MSimon]

American Economic, Scientific, Military, and Cultural dominance.

http://www.pjtv.com/?cmd=video&video-id=2378

About 15 minutes.

[MSimon]

Manufacturing holds about the same position in the American economy it has held for the last 50 or so years. About 20%.

The deal is that right now, like agriculture, we don't need many people to do the work.

[vankirkc]

American Economic, Scientific, Military, and Cultural dominance.

http://www.pjtv.com/?cmd=video&video-id=2378

About 15 minutes.

Pajama TV?

You're citing jammies to support your case?

[TDPerk]

American Economic, Scientific, Military, and Cultural dominance.

http://www.pjtv.com/?cmd=video&video-id=2378

About 15 minutes.

Pajama TV?

You're citing jammies to support your case?

Yeah, cause unlike the mainstream media, bloggers might use faked documents and crafty editing of video as evidence

[vankirkc]

American Economic, Scientific, Military, and Cultural dominance.

http://www.pjtv.com/?cmd=video&video-id=2378

About 15 minutes.

Pajama TV?

You're citing jammies to support your case?

Yeah, cause unlike the mainstream media, bloggers might use faked documents and crafty editing of video as evidence

Nobody cares enough about what the bloggers have to say to undertake any serious challenge of its factual basis. That's not the case for mainstream media.

[TallDave]

Pajama TV?

You're citing jammies to support your case?

Yeah, cause unlike the mainstream media, bloggers might use faked documents and crafty editing of video as evidence

Nobody cares enough about what the bloggers have to say to undertake any serious challenge of its factual basis. That's not the case for mainstream media.

10 years ago that was true. Today, Drudge has a bigger audience than CBS.

[TallDave]

This kind of thinking is what gets us into trouble. What makes you think that the U.S. culture is 'dominant'?

Hollywood certainly is. I assumed that was behind your "producers" allusion. Most movies actually have a larger gross outside the U.S. now.

But movie watching doesn't define a culture.

Films like Titanic, The Matrix and Dark Knight become part of our shared heritage, even if they're being sold for a dollar on Beijing streetcorners.

And of course it's not just movies. American pop culture in general has been attracting disproportionarte attention for a long time: music, TV, brands, and today video games. The Internet itself is largely an American cultural export, full of porn and punditry.

You realize of course that the figures you are quoting have adjusted downward by about 15% since December due to depreciation of the value of the dollar. I

Shrug. And it rose in 2H 2008. Anyways, it would have to fall a lot further to even come close to closing that gap. And the effect would be so devastating to export economies like Japan's that the gap might actually increase.

The new government in Japan is all about spending and fostering local markets.

We'll see how much more economic pain they're willing to accept to make that happen.

The trouble is that those benefits are realized in China, not the U.S.. Or Pakistan, or India, or Japan, or Korea, etc. Wherever the goods involved are actually being produced..which more than likely isn't the U.S..

A rising economy lifts all nations. I have nothing against poor Chinese getting a leg up; they get a standard of living a bit farther from starvation, we get cheaper consumer goods. A classic example of the benefits of free trade. And even when that money goes to foreign producers, our retailers make money too.

But collateralization is also hugely beneficial to, for example, the U.S. construction industry.

[MSimon]

Pajama TV?

You're citing jammies to support your case?

Yeah, cause unlike the mainstream media, bloggers might use faked documents and crafty editing of video as evidence :roll:

Nobody cares enough about what the bloggers have to say to undertake any serious challenge of its factual basis. That's not the case for mainstream media.

Ah - so you have no evidence and cite that as a positive for dismissing the argument.

And let me see. You need lots of people (besides yourself) to look at something and tell you what to think. Pravda. Pravda.

Couple of real strong arguments you got there feller. They are almost irrefutable. Almost.